6-K 1 pbrafs4q20usd_6k.htm PBRAFS4Q20USD_6K

 

UNITED STATES

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 February, 2021

 

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____

 

 

 
 

 

 

 
 

INDEX

PETROBRAS

 
 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 10
CONSOLIDATED STATEMENTS OF INCOME 11
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 12
CONSOLIDATED STATEMENTS OF CASH FLOWS 13
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY 14
1.   The Company and its operations 15
2.   Basis of preparation 16
3.   Significant accounting policies 17
4.   Critical accounting policies: key estimates and judgments 17
5.   New standards and interpretations 22
6.   Context, resilience measures and impacts of the COVID-19 pandemic 22
7.   Capital Management 25
8.   Cash and cash equivalents and Marketable securities 25
9.   Sales revenues 26
10.   Costs and expenses by nature 28
11.   Other income and expenses 29
12.   Net finance income (expense) 30
13.   Net  income by operating segment 31
14.   Trade and other receivables 35
15.   Inventories 37
16.   Trade payables 38
17.   Taxes 38
18.   Employee benefits 44
19.   Employee benefits (post-employment) 46
20.   Provisions for legal proceedings 56
21.   Provision for decommissioning costs 63
22.   Other Assets and Liabilities 65
23.   The “Lava Jato (Car Wash) Operation” and its effects on the Company 66
24.   Commitment to purchase  natural gas 66
25.   Property, plant and equipment 68
26.   Intangible assets 71
27.   Impairment 72
28.   Exploration and evaluation of oil and gas reserves 82
29.   Collateral for crude oil exploration concession agreements 83
30.   Partnerships in E&P activities 84
31.   Investments 86
32.   Disposal of assets and other changes in organizational structure 90
33.   Assets by operating segment 95
34.   Finance debt 96
35.   Lease liabilities 100
36.   Equity 101
37.   Fair value of financial assets and liabilities 104
38.   Risk management 106
39.   Related-party transactions 114
40.   Supplemental information on statement of cash flows 117
41.   Subsequent events 118
42.   Information related to guaranteed securities issued by subsidiaries 119
Supplementary information on Oil and Gas Exploration and Production (unaudited) 120

 

2 
 

 

 

KPMG Auditores Independentes

Rua do Passeio, 38, setor 2, 17º andar - Centro/RJ

Caixa Postal 2888 - 20021-290 - Rio de Janeiro/RJ - Brasil

Telefone +55 (21) 2207-9400

kpmg.com.br

 

 

To the Board of Directors and Shareholders of

Petróleo Brasileiro S.A. - Petrobras.

Rio de Janeiro - RJ

Opinion

We have audited the consolidated financial statements of Petróleo Brasileiro S.A. - Petrobras S.A. ("Company") which comprise the consolidated statement of financial position as at December 31, 2020, the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and notes to the consolidated financial statements, including significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Petróleo Brasileiro S.A. - Petrobras S.A., as at December 31, 2020, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board - IASB.

Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the “Auditors Responsibilities for the Audit of the Consolidated Financial Statements” section of our report. We are independent from the Company and its subsidiaries in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements and are set forth in the Professional Code of Ethics for Accountants and in the professional standards issued by the Regional Association of Accountants, and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not express a separate opinion on these matters.

 

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

 

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1 - Assessment of the measurement of the defined benefit obligations for pension and health care plans
Refer to note 19 of the consolidated financial statements.
Key audit matter How the matter was addressed in our audit

The Company sponsors defined benefit pension plans and health care plans that provide supplementary retirement benefits and medical care to its employees.

The measurement of the actuarial obligation of the pension and health plans is dependent, in part, on the selection of certain actuarial assumptions. These assumptions include the discount rate and projected medical costs. The Company hires external actuaries to assist in the process of assessing the actuarial assumptions and valuing the obligations under its pension and health care plans.

We considered the assessment of the measurement of the defined benefit obligations for the pension and health care plans as a key audit matter due to the level of judgment inherent to the actuarial assumptions determination, as well as for the significant impact that minor changes on these assumptions could have on the actuarial obligations of the pension and health care plans.

Our audit procedures included, but were not limited to:

- tests of effectiveness of certain internal controls related to the process of measuring the actuarial liability, including controls related to the development, review and approval of the discount rates and projected medical costs assumptions;

- assessment of the scope, competency, and objectivity of the external actuaries hired to assist in estimating the actuarial obligations for the pension and health care plans, including the nature and scope of the work performed, their professional qualifications and experiences; and

- assessment, with the support of our specialists on actuarial calculation, of the assumptions such as discount rates and projected medical costs, including comparing them to external sources.

According to the evidence obtained from performing the procedures described above, we considered that the measurement of the actuarial liability is acceptable in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2020.

 

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

 

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2 - Evaluation of the impairment testing of exploration and production cash generating units (“CGUs”)
Refer to note 27 of the consolidated financial statements.
Key audit matter How the matter was addressed in our audit

For the impairment of PP&E and intangible, the Company identifies its cash generating units (“CGUs”), estimates the recoverable amount of each CGUs based on a projected cash flow for each CGU, and compares to their carrying amount. The cash flow projections used to determine the recoverable amount depend on certain future assumptions such as: Brent oil price, exchange rate (Real/Dollar), capitalizing expenditures (”CAPEX”), operating expenditure (“OPEX”), and volume and timing of recovery of the oil and gas reserves. The recoverable amount is also sensitive to minor changes in the discount rate used in the cash flow.

The definition of exploration and production CGUs considers operational factors that impact the interdependencies between oil and gas assets, and, consequently, alter the aggregation or segregation of the exploration and production areas into CGUs.

Due to the level of complexity and subjectivity on the definition of exploration and production´s CGUs, and on the estimate of the recoverable amount, we considered this as a key audit matter.

Our audit procedures included, but were not limited to:

- tests of effectiveness of certain internal controls related to the process of determining the recoverable amount of exploration and production´s CGU assets, including controls related to the review and approval of the determination of the CGUs, and of the key assumptions used to estimate the recoverable amount;

- for changes in exploration and production CGUs during the year, we assessed the operational factors considered by the Company for these changes, and compared them to information obtained from internal and external sources;

- we assessed the determination of recovery of oil and gas reserves estimates, by comparing it with volumes certified by external reservoirs specialists hired by the Company, and, for a selection of CGUs, with historical data on production;

- assessment of the scope, competency, and objectivity of the external reservoir specialists hired by the Company that certified the estimated reserve volumes. This included assessing the nature and scope of the work they were engaged to perform and their professional qualifications and experience;

- we assessed, for a selection of CGUs, the CAPEX and OPEX used on the cash flow projection by comparing to the latest business plan approved by the Company, and its long-term budgets; and

- we assessed Company’s ability to project cash flows by comparing the prior years’ estimated cash flows with actual Company´s cash flows for the year ended December 31, 2020 for a selection of CGUs.

- with the support of our corporate finance specialists, we assessed the key assumptions used in the impairment testing such as the discount rates, future oil and gas prices and the exchange rates by comparing them against external market data.

According to the evidence obtained from performing the procedures described above, we considered that the recoverable amounts for the exploration and production CGUs are acceptable in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2020.

 
 

 

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

 

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3 – Evaluation of provisions and disclosures for certain specific labor, civil and tax lawsuits
Refer to note 20 of the consolidated financial statements.
Key audit matter How the matter was addressed in our audit

The Company is involved in tax, civil and labor lawsuits during the normal course of its activities.

The Company records provisions for these lawsuits when it is probable that an outflow of cash will be required to settle a present obligation, and when the outflow can be reasonably estimated. The Company discloses a contingency whenever the likelihood of loss of the lawsuit is considered possible, or when the likelihood of loss is considered probable but it is not possible to reasonably estimate the amount of the outflow.

We considered this subject to be a key audit matter due to the level of judgment embedded on estimating the related amounts, and the likelihood of an outflow of resources, coming from the most significant labor, civil and tax lawsuits.

        

        

        

Our audit procedures included, but were not limited to:

- tests of effectiveness of certain internal controls related to the process of evaluating the lawsuits, including controls related to the review and approval of the determination of the likelihood of an outflow of resources, and the estimate of the amount, as well as controls over the consolidated financial statements disclosures;

- assessment of the scope, competency, and objectivity of the internal and external legal counsel that support the Company on the definition of the estimated amounts, and the likelihood of an outflow of resources, as well as their professional qualifications and experience;

- assessment of confirmations, received directly from the external legal counsels, that included an assessment of the likelihood of loss and the estimate of the amounts. We compared these assessments and estimates to those used by the Company, and evaluated the sufficiency of the legal contingency disclosures; and

- assessment of Company’s ability to prepare these estimates by comparing the amounts paid upon resolution of legal proceedings during the year to the amounts previously provided for.

According to the evidence obtained from performing the procedures described above, we considered acceptable the level of provision for the lawsuits referred above, as well as to the respective disclosures in the consolidated financial statements taken as a whole, for the year ended December 31, 2020.

 

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

 

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4 - Evaluation of the estimate of the provision for decommissioning costs
Refer to note 21 of the consolidated financial statements.
Key audit matter How the matter was addressed in our audit

As a consequence of its operations, the Company incurs on costs related to the obligation to restore the area environment upon abandonment.

The Company’s estimate of the provision for decommissioning costs includes assumptions in relation to the extent of the obligations assumed for environmental restoration and the dismantlement and removal of oil and gas production facilities, as well as the timing and estimated costs of the abandonment.

We identified the evaluation of the estimate as a key audit matter due to the level of judgment involved on determining the respective assumptions, especially on the extent of the obligations assumed for the environmental repair, which is the criteria to be met when the restoration actually occurs, the timing and estimated costs of abandonment.

Our audit procedures included, but were not limited to:

- tests of effectiveness of certain internal controls related to the process of defining the provision for decommissioning areas estimate, . including controls related to the development, review and approval of the key assumptions such as timing of area abandonment and estimated costs of decommissioning;

- assessment of the assumption of abandonment timing used by the Company, by comparing the production curves and useful life of the oil and gas reserves used in the estimate, with oil reserve volumes certified by external reservoirs specialists hired by the Company;

- assessment of the estimated costs of decommissioning by comparing with external industry reports;

- assessment of the scope, competency, and objectivity of the Company´s internal engineers responsible for the production curves and useful life of the oil and gas reserves, as well as the external reservoir specialists hired by the Company to certify the reserve volumes. This included assessing the nature and scope of the work performed, and their professional qualifications and experience;

- assessment of Company’s ability to prepare this estimate by comparing a selection of actual expenditure incurred with the decommissioning of oil and gas production facilities already under abandonment, to the provision for decommissioning previously registered.

According to the evidence obtained from performing the procedures described above, we considered that the amount of provision for decommissioning costs is acceptable in the context of the consolidated financial statements taken as a whole, for the year ended December 31, 2020.

   

 

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

 

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Other Information

The Company's management is responsible for the other information. The other information comprises the Financial Performance Report .

Our opinion on the consolidated financial statements does not cover other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work performed, we conclude that there is material misstatement in other information, we are required to report on that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

 

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

 

8 

 

 

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with International Standards on Auditing will always detect possible existing material misstatements. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

As part of our audit in accordance with International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

-      

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve the act of collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.. 

 

-      

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

-      

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

-      

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s and its subsidiaries' ability to continue as a going concern. If we conclude that a material uncertainty exists, then we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor´s report. However, future events or conditions may cause the Company and its subsidiaries to cease to continue as a going concern.

 

-      

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 

 

-       Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and where applicable, related safeguards.

 

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Rio de Janeiro, February 24, 2021

 

 

 

KPMG Auditores Independentes

CRC SP-014428/O-6 F-RJ

 

 

 

 

Marcelo Gavioli

Accountant CRC 1SP201409/O-1

KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

9 

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

PETROBRAS

December 31, 2020 and December 31, 2019 (Expressed in millions of US Dollars, unless otherwise indicated)

 

 

Assets Note 12.31.2020 12.31.2019   Liabilities Note 12.31.2020 12.31.2019
Current assets         Current liabilities      
Cash and cash equivalents 4.1 11,711 7,372   Trade payables 16 6,859 5,601
Marketable securities 4.2 659 888   Finance debt 34.1 4,186 4,469
Trade and other receivables 14.1 4,731 3,762   Lease liability 35 5,698 5,737
Inventories 15 5,677 8,189   Income taxes payable 17.1 198 276
Recoverable income taxes 17.1 418 2,493   Other taxes payable 17.1 2,636 3,424
Other recoverable taxes 17.1 2,177 1,051   Dividends payable 36.5 858 1,558
Others 22 1,230 1,493   Short-term employee benefits 18 1,953 1,645
    26,603 25,248   Pension and medical benefits 19 1,549 887
Assets classified as held for sale 32 785 2,564   Others 22 1,603 1,973
    27,388 27,812       25,540 25,570
          Liabilities related to assets classified as held for sale 32 685 3,246
              26,225 28,816
                 
Non-current assets                
Long-term receivables         Non-current liabilities      
Trade and other receivables 14.1 2,631 2,567   Finance debt 34.1 49,702 58,791
Marketable securities 8.2 44 58   Lease liability 35 15,952 18,124
Judicial deposits 20.2 7,281 8,236   Income taxes payable 17.1 357 504
Deferred income taxes 12.4 6,451 1,388   Deferred income taxes 17.4 195 1,760
Other recoverable taxes 17.1 3,158 3,939   Pension and medical benefits 19 14,520 25,607
Others 22 635 1,503   Provisions for legal proceedings 20.1 2,199 3,113
    20,200 17,691   Provision for decommissioning costs 21 18,780 17,460
          Others 22 2,204 1,350
              103,909 126,709
          Total liabilities   130,134 155,525
                 
          Equity      
Investments 31 3,273 5,499   Share capital (net of share issuance costs) 36.1 107,101 107,101
Property, plant and equipment 25 124,201 159,265   Capital reserve and capital transactions   1,064 1,064
Intangible assets 26 14,948 19,473   Profit reserves   65,917 65,627
    162,622 201,928   Accumulated other comprehensive (deficit)   (114,734) (100,469)
          Attributable to the shareholders of Petrobras   59,348 73,323
          Non-controlling interests 31.5 528 892
              59,876 74,215
Total assets   190,010 229,740   Total liabilities and equity   190,010 229,740
The notes form an integral part of these financial statements.                
                 

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CONSOLIDATED STATEMENTS OF INCOME

PETROBRAS

Years ending December 31, 2020, 2019 and 2018 (Expressed in millions of US Dollars, unless otherwise indicated)

 

 

 

  Note 2020 2019 2018
         
Sales revenues 9 53,683 76,589 84,638
Cost of sales 10.1 (29,195) (45,732) (52,184)
Gross profit   24,488 30,857 32,454
         
Income (expenses)        
Selling expenses 10.2 (4,884) (4,476) (3,827)
General and administrative expenses 10.3 (1,090) (2,124) (2,239)
Exploration costs 28 (803) (799) (524)
Research and development expenses   (355) (576) (641)
Other taxes   (952) (619) (670)
Impairment of assets 27 (7,339) (2,848) (2,005)
Other income and expenses 11 998 1,199 (5,760)
    (14,425) (10,243) (15,666)
         
Income (loss) before finance expense, results of equity-accounted investments and income taxes   10,063 20,614 16,788
         
Finance income   551 1,330 2,381
Finance expenses   (6,004) (7,086) (5,675)
Foreign exchange gains (losses) and inflation indexation charges   (4,177) (3,008) (3,190)
Net finance expense 12 (9,630) (8,764) (6,484)
         
Results of equity-accounted investments 31.3 (659) 153 523
         
Net income (loss) before income taxes   (226) 12,003 10,827
         
Income taxes 17.3 1,174 (4,200) (4,256)
         
Net income from continuing operations for the year   948 7,803 6,571
         
Net income from discontinued operations for the year   2,560 843
         
Net income  for the year   948 10,363 7,414
         
Net income attributable to shareholders of Petrobras   1,141 10,151 7,173
Net income from continuing operations   1,141 7,660 6,572
Net income from discontinued operations   2,491 601
         
Non-controlling interests   (193) 212 241
Net income (loss) from continuing operations   (193) 143 (1)
Net income from discontinued operations   69 242
         
Basic and diluted earnings per common and preferred share - in U.S. dollars 36.6 0.09 0.78 0.55
         
The notes form an integral part of these financial statements.        

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

PETROBRAS

Years ending December 31, 2020, 2019 and 2018 (Expressed in millions of US Dollars, unless otherwise indicated)

 

 

  2020 2019 2018
Net income for the year 948 10,363 7,414
       
Items that will not be reclassified to the statement of income:      
       
Actuarial gains (losses) on post-employment defined benefit plans      
Recognized in equity 2,415 (5,589) (3,130)
Deferred income tax (127) 1,491 (119)
  2,288 (4,098) (3,249)
       
Unrealized gains  (losses) on equity instruments measured at fair value through other comprehensive income      
Recognized in equity (2) (5)
Deferred income tax 1 2
  (1) (3)
       
Share of other comprehensive income (losses) in equity-accounted investments 46
       
Items that may be reclassified subsequently to the statement of income:      
       
Unrealized gains  (losses) on cash flow hedge - highly probable future exports      
Recognized in equity (21,460) (3,510) (8,950)
Reclassified to the statement of income 4,720 3,136 3,315
Deferred income tax 5,690 126 1,916
  (11,050) (248) (3,719)
       
Cumulative translation adjustments (*)      
Recognized in equity (5,211) (1,465) (6,409)
Reclassified to the statement of income 34
  (5,211) (1,431) (6,409)
       
Share of other comprehensive income in equity-accounted investments      
Recognized in equity (378) 69 (135)
Reclassified to the statement of income 43
  (335) 69 (135)
       
Total other comprehensive income (loss) (14,263) (5,708) (13,515)
       
Total comprehensive income (loss) (13,315) 4,655 (6,101)
       
Comprehensive income (loss) attributable to non-controlling interests (189) 186 65
       
Comprehensive income (loss) attributable to shareholders of Petrobras (13,126) 4,469 (6,166)
       
(*) It includes US$ 804 loss (US$ 132 loss in 2019 and US$ 236 loss in 2018), of cumulative translation adjustments in associates and joint ventures.
The notes form an integral part of these financial statements.

 

 

12 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

PETROBRAS

Years ending December 31, 2020, 2019 and 2018 (Expressed in millions of US Dollars, unless otherwise indicated)

  2020 2019 2018
Cash flows from operating activities      
Net income (loss) for the year 948 10,363 7,414
Adjustments for:      
Net income from discontinued operations (2,560) (843)
Pension and medical benefits (actuarial expense) (1,001) 2,086 2,018
Results of equity-accounted investments 659 (153) (523)
Depreciation, depletion and amortization 11,445 14,836 11,912
Impairment of assets (reversal) 7,339 2,848 2,005
Allowance (reversals) for credit loss on trade and other receivables 144 87 91
Exploratory expenditure write-offs 456 308 87
Foreign exchange, indexation and finance charges   11,094 8,460 7,941
Deferred income taxes, net (1,743) 2,798 370
Revision and unwinding of discount on the provision for decommissioning costs 981 950 31
Inventory write-down (write-back) to net realizable value 375 15 421
PIS and COFINS recovery - exclusion of ICMS (VAT tax) from the basis of calculation (3,173)
Disposal/write-offs of assets, remeasurement of investment retained with loss of control and reclassification of CTA (456) (6,012) (416)
Early termination and cash outflows revision of lease agreements (276) (60)
Decrease (Increase) in assets      
Trade and other receivables, net 1 2,233 (1,535)
Inventories 724 (281) (2,108)
Judicial deposits (859) (2,144) (2,040)
Escrow account - Class action agreement 1,819 (2,019)
Other assets 159 (219) 461
Increase (Decrease) in liabilities      
Trade payables 216 (989) 858
Other taxes payable 3,246 225 2,265
Pension and medical benefits (1,048) (1,882) (1,002)
Provisions for legal proceedings (261) (3,767) 1,686
Short-term benefits 781 185 529
Provision for decommissioning costs (482) (512) (500)
Agreement with US authorities (768) (85)
Other liabilities (47) (259) 996
Income taxes paid (332) (2,330) (2,567)
Net cash provided by operating activities from continuing operations 28,890 25,277 25,447
Net cash provided by operating activities - discontinued operations 323 906
Net cash provided by operating activities 28,890 25,600 26,353
Cash flows from investing activities      
Acquisition of PP&E and intangibles assets (except for the Bidding for oil surplus of Transfer of rights agreement) (5,874) (8,556) (11,905)
Bidding for oil surplus of Transfer of rights agreement (15,341)
Investments in investees (942) (7) (44)
Proceeds from disposal of assets - Divestment 1,997 10,413 5,791
Reimbursement on the Transfer of rights agreement 8,361
Divestment (Investment) in marketable securities 66 198 704
Dividends received 243 1,436 994
Net cash used in investing activities from continuing operations (4,510) (3,496) (4,460)
Net cash used in investing activities - discontinued operations 1,812 (44)
Net cash used in investing activities (4,510) (1,684) (4,504)
Cash flows from financing activities      
Investments by non-controlling interest (67) (29) 43
Proceeds from financing 17,023 7,464 10,707
Repayment of principal - finance debt (25,727) (27,273) (34,013)
Repayment of  interest - finance debt (3,157) (4,501) (5,703)
Repayment of lease liability (5,880) (5,207)
Dividends paid to Shareholders of Petrobras (1,367) (1,877) (625)
Dividends paid to non-controlling interests (84) (138) (103)
Net cash used in financing activities from continuing operations (19,259) (31,561) (29,694)
Net cash used in financing activities - discontinued operations (508) (156)
Net cash used in financing activities (19,259) (32,069) (29,850)
Effect of exchange rate changes on cash and cash equivalents (773) 1,631 (619)
Net increase (decrease) in cash and cash equivalents 4,348 (6,522) (8,620)
Cash and cash equivalents at the beginning of the period 7,377 13,899 22,519
 
Cash and cash equivalents at the end of the period 11,725 7,377 13,899
       
The notes form an integral part of these financial statements.

 

13 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

PETROBRAS

Years ending December 31, 2020, 2019 and 2018 (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 Capital reserve, Capital Transactions and Treasury shares Cumulative translation adjustment Cash flow hedge - highly probable future exports Actuarial gains (losses) on defined benefit pension plans  Other comprehensive income (loss) and deemed cost Legal Statutory Tax incentives Profit retention Additional dividends proposed Retained earnings (losses) Equity attributable to shareholders of Petrobras Non-controlling interests Total consolidated equity
Balance at January 1, 2018 107,380 (279) 1,067 (61,043) (9,573) (10,015) (811) 7,919 2,182 720 42,235 (222) 79,560 1,685 81,245
    107,101 1,067       (81,442)         53,056 (222) 79,560 1,685 81,245
Realization of deemed cost (4) 4
Treasury shares (2) (2) (2)
Capital transactions 2 2 115 117
Net income 7,173 7,173 241 7,414
Other comprehensive income (6,273) (3,719) (3,209) (138) (13,339) (176) (13,515)
Appropriations:                                
Transfer to reserves 338 270 203 4,294 (5,105)
Dividends (1,850) (1,850) (234) (2,084)
Balance at December 31, 2018 107,380 (279) 1,067 (67,316) (13,292) (13,224) (953) 8,257 2,452 923 46,529 71,544 1,631 73,175
    107,101 1,067       (94,785)         58,161 71,544 1,631 73,175
Realization of deemed cost (2) 2
Treasury shares
Capital transactions (3) (3) (658) (661)
Net income 10,151 10,151 212 10,363
Other comprehensive income (1,405) (248) (4,098) 69 (5,682) (26) (5,708)
Appropriations:                                
Transfer to reserves 488 250 179 6,549 (7,466)
Dividends (2,687) (2,687) (267) (2,954)
Balance at December 31, 2019 107,380 (279) 1,064 (68,721) (13,540) (17,322) (886) 8,745 2,702 1,102 53,078 73,323 892 74,215
    107,101 1,064       (100,469)         65,627 73,323 892 74,215
Capital increase with reserves (13) (13)
Realization of deemed cost 2 (2)
Capital transactions (81) (81)
Net income 1,141 1,141 (193) 948
Other comprehensive income (loss) (5,215) (11,050) 2,288 (290) (14,267) 4 (14,263)
Appropriations:                                
Transfer to reserves 68 198 (226) (40)
Dividends (878) 1,128 (1,099) (849) (81) (930)
Balance at December 31, 2020 107,380 (279) 1,064 (73,936) (24,590) (15,034) (1,174) 8,813 2,900 1,102 51,974 1,128 59,348 528 59,876
    107,101 1,064       (114,734)         65,917 59,348 528 59,876
                                 
The notes form an integral part of these financial statements.

14 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

 

1.The Company and its operations

Petróleo Brasileiro S.A. (Petrobras), hereinafter referred to as “Petrobras” or “Company,” is a partially state-owned enterprise, controlled by the Brazilian Federal Government, of indefinite duration, governed by the terms and conditions under the Brazilian Corporate Law (Law 6,404 of December 15, 1976), Law 13,303 of June 30, 2016 and its Bylaws.

Petrobras’ shares are listed on the Brazilian stock exchange (B3) in the Level 2 Corporate Governance special listing segment and, therefore, the Company, its shareholders, its managers and fiscal council members are subject to provisions under its regulation (Level 2 Regulation - Regulamento de Listagem do Nível 2 de Governança Corporativa da Brasil Bolsa Balcão – B3). The provisions of the Level 2 Regulation, which are based on high standards of corporate governance, shall prevail over statutory provisions in the event of harm to the rights of public offers investors provided for in the Company's Bylaws, except when otherwise determined by other regulation. On February 13, 2020, as requested, Petrobras had its disassociation from the B3 State-Owned Governance Program approved.

The Company is dedicated 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.

Petrobras may perform any of the activities related to its corporate purpose, directly, through its wholly-owned subsidiaries, controlled companies, alone or through joint ventures with third parties, in Brazil or abroad.

The economic activities linked to its business purpose shall be undertaken by the Company in free competition with other companies according to market conditions, in compliance with the other principles and guidelines of Laws no. 9,478/97 and 10,438/02 (oil & gas and electricity sector regulations, respectively). However, Petrobras may have its activities, provided they are in compliance with its corporate purpose, guided by the Brazilian Federal Government to contribute to the public interest that justified its creation, aiming to meet national energy policy objectives when:

I – established by law or regulation, as well as under agreements provisions with a public entity that is competent to establish such obligation, abiding with the broad publicly stated of such instruments; and

II – the cost and revenues thereof have been broken down and disseminated in a transparent manner.

In this case, the Company’s Investment Committee and Minority Shareholders Committee, exercising their advisory role to the Board of Directors, shall assess and measure the difference between such market conditions and the operating result or economic return of the transaction, based on technical and economic criteria for investment valuation and specific operating costs and results under the Company's operations. In case a difference is identified, for every financial year, the Brazilian Federal Government shall compensate the Company.

15 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
2.Basis of preparation
2.1.Statement of compliance and authorization of consolidated financial statements

These consolidated financial statements have been prepared and are being presented in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

The consolidated financial statements have been prepared under the historical cost convention, except when otherwise indicated. The significant accounting policies used in the preparation of these financial statements are set out in their respective explanatory notes.

The preparation of the financial statements requires the use of estimates based on assumptions and judgements, which may affect the application of accounting policies and reported amounts of assets, liabilities, revenues and expenses. Although our management periodically reviews these assumptions and judgments, the actual results could differ from these estimates. For further information on accounting estimates, see note 4.

These consolidated financial statements were approved and authorized for issue by the Company’s Board of Directors in a meeting held on February 24, 2021.

2.2.Discontinued operation

After the additional sale of the Company’s interest in the subsidiary Petrobras Distribuidora (BR), carried out through a secondary public offering (follow-on) in July 2019, Petrobras is no longer the controlling shareholder of BR.

Furthermore, all requirements were met to classify this investment as a discontinued operation, in accordance with IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations, since it represented a separate major line of business. Thus, in the consolidated statement of income and cash flows, the net income, operating, investing and financing cash flows relating to BR are presented in separate line items, as a net amount for discontinued operations.

2.3.Functional and presentation currency

The functional currency of Petrobras and all of its Brazilian subsidiaries is the Brazilian Real. The functional currency of the Petrobras direct subsidiaries that operate outside Brazil is the U.S. dollar.

Petrobras has selected the U.S. dollar as its presentation currency to facilitate a more direct comparison to other oil and gas companies. The financial statements have been translated from the functional currency (Brazilian real) into the presentation currency (U.S. dollar). 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 Dec-20 Sep-20 Jun-20 Mar-20 Dec-19 Sep-19 Jun-19 Mar-19 Dec-18 Sep-18 Jun-18 Mar-18
Quarterly average exchange rate 5.39 5.38 5.39 4.47 4.12 3.97 3.92 3.77 3.81 3.95 3.61 3.24
Period-end exchange rate 5.20 5.64 5.48 5.20 4.03 4.16 3.83 3.90 3.87 4.00 3.86 3.32

 

2.4.Order of presentation of the explanatory notes

As recommended in the Conceptual Framework for Financial Reporting, the expectations of users of financial statements regarding the Company's returns depend on their assessment of the amount, timing and uncertainty of (the prospects for) future net cash inflows to the entity and on their assessment of management's stewardships of the entity’s economic resources.

Therefore, the order of the explanatory notes align the Company's financial statements with the users' view, in addition to emphasizing the importance of the Company's Strategic Management.

Thus, after the explanatory notes presenting the Company and its operations, and those related to the conceptual structure applied in the preparation of the financial statements, it proceeds with the explanatory note on Capital Management, followed by the other notes, separated by the activities as set out on the statement of cash flows.

16 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
3.Significant accounting policies

The significant accounting policies used in the preparation of the annual financial statements of the Company, for the year ended December 31, 2020, are consistent with those adopted and disclosed in the financial statements of the previous years. To aid cohesion and comprehension, the accounting policies are set out at the end of each explanatory note.

 

4.Critical accounting policies: key estimates and judgments

The preparation of the consolidated financial information requires the use of estimates and judgments for certain transactions and their impacts on assets, liabilities, income and expenses. The assumptions are based on past transactions and other relevant information and are periodically reviewed by management, although the actual results could differ from these estimates.

The impacts of COVID-19 and its effects over economic environment were considered in the preparation of these financial statements and the results of the revision of assumptions are presented in note 6.

Information about areas that require significant judgment or involve a higher degree of complexity in the application of the accounting policies and that could materially affect the Company’s financial condition and results of operations is set out as follows.

4.1.Oil and gas reserves

Oil and gas reserves are estimated based on economic, geological and engineering information, such as well logs, pressure data and fluid sample data. The reserves are used as the basis for calculating unit-of-production depreciation, depletion and amortization rates, impairment testing and decommissioning costs estimates, and for projections of highly probable future exports subject to the cash flow hedge.

Reserves estimates are revised at least annually, based on updated geological and production data of reservoirs, as well as on changes in prices and costs used in these estimates. Revisions can also result from significant changes in the Company’s development strategy or in the production capacity.

The Company determines its oil and gas reserves both pursuant to the U.S. Securities and Exchange Commission - SEC and the ANP/SPE (Brazilian Agency of Petroleum, Natural Gas and Biofuels / Society of Petroleum Engineers) criteria. The main differences between these criteria relate to the use of different economic premises and to the possibility, under the ANP/SPE criteria, to include volumes expected to be produced after the expiration of contracts related to the Brazilian fields, according to the ANP criteria.

According to the definitions prescribed by the SEC, proved oil and gas reserves are those quantities of oil and gas which, by analysis of geoscientific and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulation. Proved reserves are subdivided into developed and undeveloped reserves.

Proved developed oil and gas reserves are those that can be expected to be recovered through: (i) existing wells with existing equipment and operating methods, where the cost of the required equipment is relatively minor compared to the cost of a new well; (ii) installed extraction equipment and infrastructure operational at the time of the reserves estimate, if the extraction is by means not involving wells.

Although the Company is reasonably certain that proved reserves will be produced, the timing and amount recovered can be affected by a number of factors including completion of development projects, reservoir performance, regulatory aspects and significant changes in long-term oil and gas price levels.

Detailed information on reserves is presented as unaudited supplementary information.

a)Impacts of oil and gas reserves on depreciation, depletion and amortization

Estimates of proved reserves volumes used in the calculation of depreciation, depletion and amortization rates, under the unit-of-production method, are prepared by the Company’s technicians according to SEC definitions. Revisions to the Company’s proved developed and undeveloped reserves impact prospectively the amounts of depreciation, depletion and amortization recognized in the statement of income and the carrying amounts of oil and gas properties assets.

Therefore, considering all other variables being constant, a decrease in estimated proved reserves would increase, prospectively, depreciation, depletion and amortization expense, while an increase in reserves would reduce depreciation, depletion and amortization.

Note 25.3 provides more detailed information on depreciation, amortization and depletion.

17 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
b)Impacts of oil and gas reserves on impairment testing

The measurement of the value in use of oil and gas exploration and development assets is based on proved and probable reserves pursuant to the ANP/SPE definitions. Note 25.3 provides further information on impairment testing.

c)Impacts of oil and gas reserves on decommissioning costs estimates

The timing of abandonment and dismantling areas is based on the length of reserves depletion, in accordance with ANP/SPE definitions. Therefore, the review of the timing of reserves depletion may impact the provision for decommissioning cost estimates. Note 4.6 provides further information on other assumptions used in estimating the provision for decommissioning costs.

d)Impacts of oil and gas reserves on highly probable future exports subject to cash flow hedge accounting

The Company estimates highly probable future exports in accordance with future exports forecasted in the current Strategic Plan projections. Changes in the expected oil and gas production may affect future exports forecasts and, consequently, hedge relationship designations may also be impacted.

4.2.Main assumptions for impairment testing

Impairment testing involves uncertainties mainly related to its key assumptions: average Brent prices and Brazilian Real/U.S. dollar average exchange rate. These assumptions are relevant to virtually all of the Company’s operating segments and a significant number of interdependent variables are derived from these key assumptions and there is a high degree of complexity in their application in determining value in use for impairment tests.

The markets for crude oil and natural gas have a history of significant price volatility and although prices can drop precipitously, industry prices over the long term tends to continue being driven by market supply and demand fundamentals.

Projections relating to the key assumptions are derived from the Strategic Plan and are consistent with market evidence, such as independent macro-economic forecasts, industry analysts and experts. Back testing analysis and feedback process in order to continually improve forecast techniques are also performed.

The Company’s oil price forecast model is based on a nonlinear relationship between variables reflecting market supply and demand fundamentals. This model also takes into account other relevant factors, such as the effects of OPEC decisions on the oil market, industry costs, idle capacity, the oil and gas production forecasted by specialized firms, the relationship between the oil price and the U.S. dollar exchange rate.

The Real/U.S. dollar exchange rate projections are based on econometric models that take into account long-term assumptions involving observable inputs, such as country risk, commodity prices, interest rates and the value of the U.S. Dollar relative to a basket of foreign currencies (U.S. Dollar Index – USDX).

Changes in the economic environment may result in changing assumptions and, consequently, the recognition of impairment charges or reversals on certain assets or CGUs. For example, the Brent price directly impacts the Company’s sales revenue and refining margins, while the Brazilian Real/U.S. dollar exchange rate mainly impacts our capital and operating expenditures.

Changes in the economic and political environment may also result in higher country risk projections that would increase discount rates for impairment testing.

In addition, changes in reserve volumes, production curve expectations and lifting costs could trigger the need for impairment assessment, as well as capital expenditure decisions, which are also affected by the Company’s plan to reduce its leverage, may result in postponement or termination of projects, reducing their economic feasibility.

The recoverable amount of certain assets may not substantially exceed their carrying amounts and, therefore, it is reasonably possible that outcomes in future periods that are different from the current assumptions may result in the recognition of additional impairment charges on these assets, as described in note 27.1.5.

4.3.Identifying cash-generating units for impairment testing

Identifying cash-generating units (CGUs) requires management assumptions and judgment, based on the Company’s business and management model. Changes in the aggregation of assets into CGUs may occur due to a review of investment, strategic or operational factors, which could result in changes in the interdependencies between those assets and, consequently, alter the aggregation or breakdown of assets into CGUs or individual assets. Therefore, this change could result in additional impairment charges or reversals. The primary considerations in relation to identifying the CGUs are set out below:

18 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

a)Exploration and Production CGUs:

i) Crude oil and natural gas producing properties CGUs: comprises exploration and development assets related to crude oil and natural gas fields and groups of fields in Brazil and abroad. At December 31, 2020, Exploration and Production CGUs had 132 fields and 30 groups of fields. Changes in the aggregation of CGUs are presented in note 27.

ii) Drilling rigs are not part of any CGU and are assessed for impairment separately.

b)Refining, transportation and marketing CGUs:

i) Downstream CGU: comprises refineries and associated assets, terminals and pipelines, as well as logistics assets operated by Transpetro, with a combined and centralized operation of logistical and refining assets in Brazil. These assets are managed with a common goal of achieving efficiency, profitability and strategic value long term on a nationwide basis. They are not operated for the generation of profit by asset/location. The operational planning is made in a centralized manner and these assets are not managed, measured or evaluated by their individual results. The refineries do not have autonomy to choose the oil to be processed, the mix of oil products to produce, the markets in which these products will be traded, which amounts will be exported, which intermediaries will be received and to decide the sale prices of oil products. The operational decisions are analyzed through an integrated model of operational planning for market supply. This model evaluates the solutions to supply the market considering all the options for production, importing, exporting, logistics and inventories seeking a comprehensive optimum for Petrobras and not for the profit of each unit. The decision regarding a new investment is not based on the profitability of the project for the asset where it will be installed, but for Petrobras as a whole. The model that supports the entire planning, used in the studies of technical and economic feasibility of new investments in refining, may, in its indications, allocate a lower economic kind of oil to a certain refinery or define a lower economic mix of products to it, or even force it to supply more distant markets (area of influence), leading it to operate with reduced margins if seen individually, in case this is the best for the integrated system as a whole. Pipelines and terminals are an integral part and interdependent portion of the refining assets, required to supply the market.

ii) CGU Comperj: comprises assets of the first refining unit of Petrochemical Complex of Rio de Janeiro. The utilities plant that supports the natural gas processing plant (UPGN) of the route 3 integrated project is under construction. This asset is assessed for impairment separately;

iii) CGU Second Refining Unit of RNEST: comprises assets of the second refining unit of Abreu e Lima refinery;

iv) Transportation CGU: comprises assets relating to Transpetro’s fleet of vessels. In 2020, the Cartola and Afaulfo Alves vessels were excluded from this CGU, because they ceased operations, and were tested for impairment separately;

v) PANAMAX CGU: comprises Panamax class vessels under construction (EI-512, EI-513 and EI-514);

vi) Hidrovia CGU: comprises the fleet of vessels under construction of the Hidrovia project (transportation of ethanol along the Tietê River);

vii) SIX CGU: shale processing plant; and

viii) Other operations abroad defined as the smallest group of assets that generates independent cash flows.

c)Gas & Power CGUs:

i) Natural gas CGU: comprises natural gas pipelines, natural gas processing plants, consolidating the purchase, transportation and treatment of natural gas businesses, in order to enable the commercialization of natural gas and its liquids (LPG, NGL and ethane). In 2020, management decided to cease operations of UPGN Atalaia, which was tested for impairment separately;

ii) CGU nitrogen fertilizer plants: the nitrogen fertilizer plants have been assessed for impairment separately;

iii) Power CGU: comprises the thermoelectric power generation plants (UTEs);

iv) Termocamaçari CGU: the Termocamaçari thermoelectric plant was assessed for impairment separately because there is no expectation of future operation;

v) Other CGUs: operations abroad defined as the smallest group of assets that generates largely independent cash flows.

19 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
d)Biofuels business CGUs:

i) Biodiesel CGU: an integrated unit of biodiesel plants defined based on the production planning and operation process, that takes into consideration domestic market conditions, the production capacity of each plant, as well as the results of biofuels auctions and raw materials supply.

ii) Quixadá CGU: comprises the assets of Quixadá Biofuel Plant. This plant is assessed for impairment separately due to its discontinued operation.

Investments in associates and joint ventures, including goodwill, are assessed for impairment separately.

Further information on impairment testing is set out in note 27.

4.4.Pension and other post-retirement benefits

The actuarial obligations and net expenses related to defined benefit pension and health care post-retirement plans are computed based on several financial and demographic assumptions, of which the most significant are:

·Discount rate: comprises the projected future inflation in addition to an equivalent discounted interest rate that matches the duration of the pension and health care obligations with the future yield curve of long-term Brazilian Government Bonds; and
·Medical costs: comprise the projected growth rates based on per capita health care benefits paid over the last five years, which are used as a basis for projections, converged to the general price inflation index within 30 years.

These and other estimates are reviewed at least annually and may differ materially from actual results due to changing market and financial conditions, as well as actual results of actuarial assumptions.

The sensitivity analysis of discount rates and changes in medical costs as well as additional information about actuarial assumptions are set out in note 19.

4.5.Estimates related to contingencies and legal proceedings

The Company is defendant in arbitrations and in legal and administrative proceedings involving civil, tax, labor and environmental issues arising from the normal course of its business, and makes use of estimates to recognize the amounts and the probability of outflow of resources, based on reports and technical assessments from legal advisors and on management’s assessment.

These estimates are performed individually, or aggregated if there are cases with similar characteristics, primarily considering factors such as assessment of the plaintiff’s demands, consistency of the existing evidence, jurisprudence on similar cases and doctrine on the subject. Specifically for lawsuits by outsourced employees, the Company estimates the expected loss based on a statistical procedure, due to the number of actions with similar characteristics.

Arbitral, legal and administrative decisions against the Company, new jurisprudence and changes of existing evidence can result in changes regarding the probability of outflow of resources and on the estimated amounts, according to the assessment of the legal basis.

Note 20 provides further detailed information about contingencies and legal proceedings.

4.6.Decommissioning costs estimates

The Company has legal and constructive obligations to remove equipment and restore onshore and offshore areas at the end of operations. Its most significant asset removal obligations relates to offshore areas. Estimates of costs for future environmental cleanup and remediation activities are based on current information about costs and expected plans for remediation. These obligations are recognized at present value, using a risk-free discount rate, adjusted to the Company's credit risk. Due to the long term until the abandonment, changes in the discount rate can cause significant variations in the recognized amount.

These estimates require performing complex calculations that involve significant judgment since: i) the obligations are long-term; ii)the contracts and regulations contain subjective definitions of the removal and remediation practices and criteria involved when the events actually occur; and iii) asset removal technologies and costs are constantly changing, along with regulations, environmental, safety and public relations considerations.

20 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

The Company conducts studies to incorporate technologies and procedures to optimize the process of abandonment, considering industry best practices. However, the timing and amounts of future cash flows are subject to significant uncertainty.

Note 21 provides further detailed information about the decommissioning provisions.

4.7.Deferred income taxes

The recognition of deferred taxes involves significant estimates and judgments by the Company. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which a deductible temporary difference can be utilized or it is probable that the entity will have sufficient taxable profit in future periods. In evaluating whether it will have sufficient taxable profit in future periods to support the recognition of deferred tax assets, the Company uses future projections and estimates based on its Strategic Plan, which is approved by the Board of Directors annually. Future taxable profits projections are mainly based on the following assumptions: i) Brent crude oil prices; ii) foreign exchange rates; and iii) the Company’s projected net finance expenses (income).

Changes in deferred tax assets and liabilities are presented in note 17.

4.8.Cash flow hedge accounting involving the Company’s future exports

The Company determines its future exports as “highly probable future exports” based on its current Strategic Plan. The highly probable future exports are determined by a percentage of projected exports revenue over the mid and long term, taking into account the Company’s operational and capital expenditure optimization model, limited to a threshold based on a historical percentage of the oil production that is usually sold abroad. Future exports forecasts are reviewed whenever the Company reviews its Strategic Plan assumptions. The approach for determining exports as highly probable future exports is reviewed annually, at least.

See note 38.3 for more detailed information about cash flow hedge accounting and a sensitivity analysis of the cash flow hedge involving future exports.

4.9.Write-off – overpayments incorrectly capitalized

As described in note 23, in the third quarter of 2014, the Company developed an estimation methodology and wrote off US$2,527 of capitalized costs representing the estimated amounts that Petrobras had overpaid for the acquisition of property, plant and equipment.

The Company has continuously monitored the results of the Lava Jato investigation and the availability of other information related to the scheme of improper payments. In preparing the financial statements for the year ended December 31, 2020, the Company has not identified any additional information that would affect the adopted calculation methodology and consequently require additional write-offs.

4.10.Expected credit losses on financial assets

Expected credit losses on financial assets are based on assumptions relating to risk of default, the determination of whether or not there has been a significant increase in credit risk and expectation of recovery, among others. The Company uses judgment for such assumptions in addition to information from credit rating agencies and inputs based on collection delays.

4.11.Leases

The Company uses incremental borrowing rates to determine the present value of the lease payments, when the interest rate implicit in the lease cannot be readily determined. These incremental borrowing rates are determined mainly based on the Company’s cost of funding based on yields of bonds issued by the Company, adjusted by currency and duration of cash outflows of the lease arrangements, economic environment of the country where the lessee operates and similar collateral.

4.12.Uncertainty over Income Tax Treatments

Uncertainties over income tax treatments represent the risks that the tax authority does not accept a certain tax treatment applied by the Company. The Company estimates the probability of acceptance of an uncertain tax treatment by the tax authority based on technical assessments by its legal advisors, considering precedent jurisprudence applicable to current tax legislation, which may be impacted mainly by changes in tax rules or court decisions which may affect the analysis of the fundamentals of uncertainty.

21 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
5.New standards and interpretations
5.1.New International Financial Reporting Standards not yet adopted
Standard Description Effective on
Interest Rate Benchmark Reform (Phase 2) – Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. The amendments relates to the interest rate benchmark reform and transition to IBOR recommended by the Financial Stability Board (FSB), which establishes new requirements relating to the basis for determining the contractual cash flows of financial assets and liabilities measured at amortized cost under the scope of IFRS 9; lease liabilities; hedge accounting; and disclosures. January 1, 2021, retrospective application (with certain exceptions).
Annual Improvements to IFRS Standards 2018–2020. The amendments change requirements related to: (i) simplifying the application of IFRS 1 by a subsidiary that becomes a first-time adopter of IFRS after its parent company has already adopted IFRS; (ii) clarifying the fees a company includes in assessing the terms of a new or modified financial liability in order to determine whether to derecognize a financial liability (IFRS 9); and (iii) aligning the fair value measurement requirements in IAS 41 with those in other IFRS Standards. Additionally, the amendments change an illustrative example accompanying IFRS 16 regarding lease incentives. January 1, 2022, prospective application.
Reference to the Conceptual Framework - Amendments to IFRS 3 The amendments (i) update a certain reference in IFRS 3 to the most recent conceptual framework and (ii) include additional requirements related to obligations under the scope of IAS 37 - Provisions, Contingent Liabilities and Contingent Assets and IFRIC 21 - Levies. In addition, the amendments provide that the buyer should not recognize contingent assets acquired in a business combination. January 1, 2022, prospective application.
Onerous Contracts - Cost of Fulfilling a Contract - Amendments to IAS 37 The amendments specify which costs an entity includes in determining the cost of fulfilling a contract in assessing whether the contract is onerous. January 1, 2022.
Property, Plant and Equipment: Proceeds before Intended Use - Amendments to IAS 16 The amendments prohibit a company from deducting plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use from the cost of property. Instead, a company will recognize such sales proceeds and related cost in profit or loss. January 1, 2022, retrospective application (with certain exceptions).
Classification of Liabilities as Current or Non-current - Amendments to IAS 1 The amendments establish requirements for the classification of a liability as current or non-current. January 1, 2023, retrospective application.
IFRS 17 – Insurance Contracts (and Amendments) IFRS 4 – Insurance Contracts will be superseded by IFRS 17, which stablishes the requirements to be applied in the recognition and disclosure of insurance and reinsurance contracts. January 1, 2023, retrospective application, with certain exceptions.
 
 

Petrobras and its subsidiaries have debts indexed to Libor, corresponding to 32% of total finance debt.

In order to prepare for the transition to alternative reference rates, the Company is monitoring the new regulations, aiming at adapting its financial instruments to the new benchmark.

The Company is currently assessing potential impacts arising from the initial application of amendments and new standards listed above, effective as of January 1, 2022, on its consolidated financial statements.

6.Context, resilience measures and impacts of the COVID-19 pandemic
6.1.Context

In January 2020, China reported having identified a new variant of coronavirus, causing the disease COVID-19, which was spreading quickly in its population. On March 11, 2020, COVID-19 was a declared a pandemic by the World Health Organization (WHO). Social isolation measures arising from this pandemic affected the global economic environment, reducing the demand for oil and its oil products and triggering a shock in the oil and gas industry.

Therefore, in early April, members of the Organization of the Petroleum Exporting Countries and other oil producing countries (OPEC+) announced a new agreement providing for the cut of their combined production by 9.7 million barrels per day (bpd) for May and June 2020, after Brent prices present a material reduction in March and April, reaching the lowest price of the year (US$ 19.33 per barrel). In another meeting held in July 2020, OPEC+ members agreed to reduce their cuts from 9.7 million bpd to 7.7 million bpd from August to December 2020. In December 2020, OPEC+ members decided to reduce their cuts to 7.2 million bpd, mentioning that additional and gradual increases in oil production may occur in the following months.

22 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

These events led the Company to bring forward, in the first quarter of 2020, the approval of a new set of assumptions for oil prices, exchange rates and demand, since the short, medium and long-term estimates for these variables were no longer compatible with those approved in the 2020-2024 Strategic Plan. This new set of assumptions was reflected in the interim financial statements of the first quarter of 2020.

The Company regularly monitors realized prices in relation to its assumptions and observed relevant changes in market conditions compared to that approved in the first quarter of 2020, such as the recovery in Brent oil prices and the devaluation of the Real against the U.S. Dollar. Thus, events led the Company to incorporate, in its 2021-2025 Strategic Plan (approved in November 2020), new projections aiming at adjusting short and medium-term premises, but maintaining the convergence of Brent oil price to US$ 50 per barrel in the long-term.

6.2.Resilience measures

The Company, in line with the recommendations of the WHO and the Ministry of Health, announced measures to preserve the health of its employees and support the prevention of contagion in its administrative and operational areas. Some of the measures includes home office for activities which can be realized remotely; temporarily changed work shifts in operational areas to minimize the number of workers commuting; rigorous cleaning of workplaces; distribution of face masks; testing, tracking and quarantine for covid-19; measuring body temperature and testing on pre-shipment for oil platforms and periodically on onshore plants; health monitoring and access to telemedicine services.

Brazilian governmental authorities, in turn, implemented a set of measures to address the economic side effects of the COVID-19 pandemic, aimed at helping the productive sector, mainly: (a) Federal Government measures - (i) PIS/Cofins and INSS-Companies’ Contribution - collections for the period from March to May 2020 were postponed to August until November 2020; (ii) FGTS - collections for the period from March to May 2020 were paid in six installments from July to December 2020; (iii) System S (employer contributions to social entities that train and support employees) - 50% reduction in rates from April to June 2020; and (iv) IOF - reduction from 3% to 0% in operations carried out from April to December 2020; and (b) State of Pernambuco measures - (i) ICMS tax on fuel imports from April to December 2020 was deferred for up to 30 days.

As a result of the abrupt reduction in the demand and prices of oil and fuel, the Company adopted a set of measures aiming at reducing costs, postponing cash outflows and optimizing its working capital. The main measures are:

 

·Draw down of revolving credit lines, amounting to US$ 8 billion, as well as other lines in the domestic banking market, in the total amount of US$ 698, in the first quarter of 2020. In the third quarter of 2020, the Company repaid US$ 7.6 billion of revolving credit lines (see note 34).
·postponement of payment of declared dividends based on 2019 earnings, paid on December 15, 2020;
·postponement of judicial deposits to 2021, mainly relating to tax proceedings;
·reduction and postponement of human resources expenses, with an emphasis on: (i) postponement of payment for the 2019 Performance Award Program to December 2020; (ii) postponement of the payment of 30% of the total monthly remuneration from April to June 2020 of the Board of Directors, President, Executive Officers and upper management, and postponement of the payment of between 10% to 30% of the monthly remuneration of lower management and consultants (which was subsequently paid in September 2020); and (iii) temporary change in workday regime from shift turn and stand-by work to administrative regime, reassessed on a monthly basis, depending on the return to regular operations;
·a set of actions aiming at reducing capital expenditures scheduled for 2020 from US$ 12 billion to US$ 8.1 billion, mainly postponement of exploratory activities and interconnection of wells, as well as the depreciation of the Brazilian real against the U.S. dollar;
·reduction of 200 thousand bpd of oil production from April 2020 (including the reduction of 100 thousand bpd announced at the end of March 2020), and a reduction in the utilization factor of refineries from 79% to 60%, allowing the maintenance of reasonable surplus in the storage capacity, aiming at avoiding the adoption of costly measures such as the chartering of ships to store liquids. However, with the evolution of the demand for our products performing better than expected, the Company opted for the gradual return to the previous level of average oil production, accompanied by an increase in the utilization factor of the refining facilities;
·a set of actions intending to decrease operating expenses for 2020 by an additional US$ 2 billion, mainly by: (i) hibernation of platforms operating in shallow waters, which have higher lifting costs per barrel, and for which, due to the drop in oil prices, the Company estimates negative cash flows; (ii) lowering expenses with stoppages in wells and optimization of production logistics; and (iii) postponement of new relevant contracts for a period of 90 days (during the second quarter of 2020); and

23 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
·as a result of the structural reduction in the demand for natural gas in the Brazilian market, with the consequent declaration of force majeure by all local natural gas distributors, the Company declared force majeure in the agreements for the purchase of natural gas from the Manati field and from Yacimientos Petrolíferos Fiscales Bolivianos (YPFB), as provided for in these contracts. These measures resulted in a reduction of potential disputes, exempting the Company from complying with the take-or-pay obligations. In September 2020, with the resumption of consumption from our customers, both contracts were resumed in their normal supply conditions.

In addition, the global adverse scenario encouraged the Company to revise its main metric relating to indebtedness, contained in the Strategic Plan 2020-2024, replacing the Net debt / Adjusted EBITDA ratio with Gross debt. The target approved for Gross debt for 2020 is US$ 87 billion, the same level as December 31, 2019, which was achieved at December 31, 2020.

As a result of the implementation of the aforementioned measures, the Company, after simulating several stress scenarios, estimates that it will be able to balance its financing and cash flows. Thus, management believes that it has adequate resources to continue its operations for at least 12 months after the reporting date and, therefore, the Company comply with the going concern principle in the preparation of these consolidated financial statements.

6.3.Effects on these consolidated financial statements

The effects of the COVID-19 pandemic and the economic environment were considered in the preparation of these consolidated financial statements. For information on key estimates and judgments that require a high level of judgment and complexity in their applications and that could materially affect the Company's financial condition and results, see note 4.

The results of the revision of assumptions (both in the first quarter of 2020 and in the 2021-2025 Strategic Plan), as well as the effects arising from the pandemic, are presented below:

·Impairment losses for 2020 amounted to US$ 7,339. Oil prices and expectations for the world economy growth presented a consistent decline in 2020, since the end of March 2020, as well as the demand for oil products was also severely affected in this period. As a result, in the first quarter of 2020, the Company adopted a new set of assumptions adjusted from those approved in the 2020-2024 Strategic Plan, as well as decided to hibernate certain developed fields which management did not considered highly profitable. Thus, impairment losses were recognized in the first quarter of 2020 in the amount of US$ 13,371. In the last quarter of 2020, the Company approved its 2021-2025 Strategic Plan, updating expected future production, project portfolio, economic assumptions, among other estimates. In this context, impairment reversals were accounted for in the last quarter, in the amount of US$ 6,019 (see note 27);
·expected exports were impacted by the effects arising from the oil price shock in the first half of 2020 and effects arising from the COVID-19 pandemic. Thus, a portion of highly probable future exports whose exchange rate variations were designated in hedge relationships are no longer considered highly probable, but are still expected to occur, and as a consequence the hedge relationships were revoked in the first quarter of 2020, in the amount of US$ 35,774, significantly increasing the Company's U.S. dollar/real exposure at March 31, 2020. According to the 2021-2025 Strategic Plan, there is an increase in expected exports compared to the expectation in the first quarter and consequently in highly probable future exports, but not in an amount equal to or greater than the finance debt and lease liabilities subject to designation as hedge instruments. As a result, the relevant increase in Dollar/Real exposure observed during 2020 remains at December 31, 2020. In 2020, US$ 548 was reclassified from Other comprehensive income to the Statement of income, mainly in the first quarter of 2020 (note 38.3);
·inventories adjusted to net realizable value, accounting for a US$ 375 loss within cost of sales (note 15);
·recognition of expected credit losses (ECL) on the Company's financial assets that are not measured at fair value through profit or loss considered estimated impacts of the COVID-19 pandemic throughout 2020. For financial assets whose counterparties have ratings published by credit risk agencies, when already reflecting the effects of the pandemic, the information was used to calculate the ECL. For other financial assets, in general, the expected effects of the COVID-19 pandemic were incorporated into the ECL by identifying the changes in default probability based on observable data by area of operation, type of product and region. No significant effects were identified (note 14.3);
·deferred tax assets were assessed for recoverability based on projections of future taxable profits (note 17);
·with the approval of the 2021-2025 Strategic Plan, new estimates of oil and gas reserves were incorporated to reflect the update on the Company's project portfolio, the technical uncertainties and the updated assumptions such as prices and costs. Therefore, the provision for decommissioning costs was adjusted by US$ 5,720 (note 21);
·revenue recognition from contracts with customers had no changes in its assumptions. The expectation of satisfaction of the obligation by the customer remains at the maturity of each operation, considered highly probable. The Company’s customers gave no indication about the intent to breach or revise the terms and conditions of contracts in effect as of December 31, 2020; and

 

24 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
·the Company's litigation includes no cases related to COVID-19 with potential financial risk that directly impact this financial information. However, the Company is aware of some recent labor actions filed by certain unions, whose claims are related to the pandemic and the resilience measures recently announced to reduce expenses, as follows: (i) two temporary measures to contain personnel expenses; (ii) sufficiency of the preventive measures against the spread of COVID-19 and the criteria used for removing people from the risk group; and (iii) the union's participation in the organizational response structure. The best estimate for these claims as of the reporting date is that the likelihood of loss is not probable.

 

7.Capital Management

The Company’s objectives in its capital management is to achieve an adequate level of return on its capital structure in order to safeguard its ability to continue as a going concern, adding value to its shareholders and investors. Its main sources of funding have been cash provided by its operating activities and divestments.

The reduction in the cost of capital, by means of its liability management, is one of the pillars of the 2021-2025 Strategic Plan. The Company aims to mitigate risks by actively managing liabilities, maximizing shareholder return and optimizing working capital.

Gross debt (composed of finance debt and lease liability, current and non-current) is a top metric for the Company, allowing monitoring Petrobras’s indebtedness, which management considers essential for increasing competitiveness with peers by reducing our cost of capital. For 2021, the Company seeks to reduce its gross debt to US$ 67 billion. In addition, the Shareholders Dividends Policy determines that, in case of a gross debt lower than US$ 60 billion (which is targeted for 2022), it may distribute 60% of the difference between net cash provided by operating activities and acquisition of PP&E and intangibles assets, as set out in note 36.

As of December 31, 2020, gross debt decreased to US$ 75,538, from US$ 87,121 as of December 31, 2019.

8.Cash and cash equivalents and Marketable securities
8.1.Cash and cash equivalents
  12.31.2020 12.31.2019
Cash at bank and in hand 552 572
Short-term financial investments    
- In Brazil    
Brazilian interbank deposit rate investment funds and other short-term deposits 2,592 1,699
Other investment funds 28 4
  2,620 1,703
- Abroad    
Time deposits 2,574 7
Automatic investing accounts and interest checking accounts 5,633 4,620
Other financial investments 332 470
  8,539 5,097
Total short-term financial investments 11,159 6,800
Total cash and cash equivalents 11,711 7,372

 

 

Short-term financial investments in Brazil primarily consist of investments in funds holding Brazilian Federal Government Bonds that can be redeemed immediately, as well as reverse repurchase agreements that mature within three months as of the date of their acquisition. Short-term financial investments abroad comprise time deposits that mature in three months or less from the date of their acquisition, highly-liquid automatic investment accounts, interest checking accounts and other short-term fixed income instruments.

8.2.Accounting policy for cash and cash equivalents

Cash and cash equivalents comprise cash on hand, term deposits with banks and short-term highly-liquid financial investments that are readily convertible to known amounts of cash, are subject to insignificant risk of changes in value and have a maturity of three months or less from the date of acquisition.

25 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
8.3.Marketable securities
      12.31.2020     12.31.2019
  In Brazil Abroad Total In Brazil Abroad Total
Fair value through profit or loss 652 652 875 875
Fair value through other comprehensive income 7 7
Amortized cost 44 7 51 45 19 64
Total 696 7 703 927 19 946
Current 652 7 659 875 13 888
Non-current 44 44 52 6 58

 

 

Marketable securities classified as fair value through profit or loss refer mainly to investments in Brazilian Federal Government Bonds. These financial investments have maturities of more than three months and are generally classified as current assets due to their maturity or the expectation of their realization in the short term.

8.3.1.Accounting policy for marketable securities

Marketable securities are initially measured at fair value and their subsequent measurement depends on their classification: 

·Amortized cost: when the contractual terms of the security give rise on specified dates to cash flows arising from payments of principal and interest on the principal amount outstanding, and the business model’s objective is to hold the security in order to collect contractual cash flows. The interest income is based on the effective interest method.
·Fair value through other comprehensive income: equity instruments not held for trading purposes for which the Company has made an irrevocable election in their initial recognition to present changes in fair value in other comprehensive income rather than within profit or loss;
·Fair value through profit or loss: if the marketable security do not meet the criteria for the two aforementioned categories.

 

9.Sales revenues
9.1.Revenues from contracts with customers

As an integrated energy company, revenues from contracts with customers derive from different products sold by the Company’s operating segments, taking into consideration specific characteristics of the markets where they operate. For additional information about the operating segments of the Company, its activities and its respective products sold, see note 13.

The determination of transaction prices derives from methodologies and policies based on the parameters of these markets, reflecting operating risks, level of market share, changes in exchange rates and international commodity prices, including Brent oil prices, oil products such as diesel and gasoline, and the Henry Hub Index.

Revenues from sales are recognized at the moment the control is transferred to the client, that occurs upon delivery at the contractually agreed place or when the service is provided. Generally, prices for products and services are fixed prior to or shortly after delivery. Therefore, no significant changes in transactions prices are expected to be recognized in periods after the satisfaction of the performance obligations, except for some exports in which final prices are linked to changes in commodity price after their transfer of control. Sales proceeds are generally collected in the short-term, thus there are no significant financing components.

In addition, the Company acts as an agent in the biofuel business, where there is no control of the biodiesel purchased from the producers and sold to distributors at any time during the sale operation. Those revenues totaled US$ 37 in 2020 (US$ 46 in 2019).

26 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
9.2.Net sales revenues
  2020 2019 2018
Diesel 13,924 23,007 23,450
Diesel subsidy - - 1,415
Gasoline 6,313 9,810 11,690
Liquefied petroleum gas 3,383 4,159 4,490
Jet fuel 1,455 3,832 4,208
Naphtha 1,694 1,669 2,455
Fuel oil (including bunker fuel) 795 1,026 1,233
Other oil products 2,712 3,410 3,769
Subtotal oil products 30,276 46,913 52,710
Natural gas 3,649 5,929 5,425
 Renewables  and nitrogen products 59 245 366
Breakage 438 645 687
Electricity 1,109 1,322 2,027
Services, agency and others 803 940 1,370
Domestic market 36,334 55,994 62,585
Exports 15,945 18,085 15,413
Oil 11,720 13,180 11,192
Fuel oil (including bunker fuel) 3,525 3,321 3,022
Other oil products 700 1,584 1,199
Sales  abroad (*) 1,404 2,510 6,640
Foreign market 17,349 38,680 22,053
Sales revenues (**) 53,683 76,589 84,638
       
(*) Sales revenues from operations outside of Brazil, including trading and excluding exports.
(**) Sales revenues by business segment are set out in note 9.
       

 

 

Following the reduction of the investment in BR Distribuidora on July 25, 2019, this company became a non-consolidated entity. Hence, sales to this associate represent more than 10% of the Company sales revenues, mainly associated with the refining, transportation and marketing segment.

9.3.Remaining performance obligations

The Company is party to sales contracts with original expected duration of more than 1 year, which define the volume and timing of goods or services to be delivered during the term of the contract, and the payment terms for these future sales.

The estimated remaining values of these contracts at December 31, 2020 presented below are based on the contractually agreed future sales volumes, as well as prices prevailing at December 31, 2020 or practiced in recent sales reflecting more directly observable information:

  Expected recognition within 1 year Expected recognition after 1 year Total
Domestic market      
Gasoline 6,561 - 6,561
Diesel 15,008 - 15,008
Natural gas 4,383 7,865 12,248
Services and others 4,110 4,330 8,440
Naphtha 946 3,703 4,649
Electricity 713 2,491 3,204
Other oil products 17 - 17
Jet fuel 404 - 404
Foreign market   -  
Exports 1,925 9,539 11,464
Total 34,067 27,928 61,995

 

 

Revenues will be recognized once goods are transferred and services are provided to the customers and their measurement and timing of recognition will be subject to future demands, changes in commodities prices, exchange rates and other market factors.

27 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

The table above does not include information on contracts with original expected duration of less than one year, such as spot-market contracts, variable considerations which are constrained, and information on contracts only establishing general terms and conditions (Master Agreements), for which volumes and prices will only be defined in subsequent contracts.

In addition, electricity sales are mainly driven by demands to generate electricity from thermoelectric power plants, as and when requested by the Brazilian National Electric System Operator (ONS). These requests are substantially affected by Brazilian hydrological conditions. Thus, the table above presents mainly fixed amounts for the electricity to be available to customers in these operations.

9.4.Contract liabilities

The balance of contract liabilities carried on the statement of financial position at December 31, 2020 amounted to US$ 69 (US$ 128 as of December 31, 2019). This amount is classified as other current liabilities and primarily comprises advances from customers in ship and take or pay contracts to be recognized as revenue based on future sales of natural gas or following the non-exercise of the right by the customer.

9.5.Accounting policy for revenues

The Company evaluates contracts with customers that will be subject to revenue recognition and identifies the distinct goods and services promised in each of them.

Performance obligations are promises to transfer to the customer goods or services (or a bundle of goods or services) that are distinct, or series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Revenues are measured based on the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Transaction prices are based on contractually stated prices, reflecting the Company's pricing methodologies and policies based on market parameters.

When transferring a good, that is, when the customer obtains its control, the company satisfies the performance obligation and recognizes the respective revenue, which usually occurs at a point in time upon delivery.

 

10.Costs and expenses by nature
10.1.Cost of sales
  2020 2019 2018
Raw material, products for resale, materials and third-party services (*) (12,699) (20,694) (26,810)
Depreciation, depletion and amortization (8,847) (12,036) (10,954)
Production taxes (5,920) (9,741) (10,905)
Employee compensation (1,729) (3,261) (3,515)
Total (29,195) (45,732) (52,184)
(*) It Includes short-term leases and inventory turnover.

 

 

10.2.Selling expenses
  2020 2019 2018
Materials, third-party services, freight, rent and other related costs (4,163) (3,664) (3,445)
Depreciation, depletion and amortization (564) (549) (145)
Allowance for expected credit losses 2 (49) (32)
Employee compensation (159) (214) (205)
Total (4,884) (4,476) (3,827)
 

 

 

28 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
10.3.General and administrative expenses
  2020 2019 2018
Employee compensation (749) (1,427) (1,500)
Materials, third-party services, freight, rent and other related costs (252) (539) (626)
Depreciation, depletion and amortization (89) (158) (113)
Total (1,090) (2,124) (2,239)
       

 

 

11.Other income and expenses
  2020 2019 2018
PIS and COFINS credit - exclusion of ICMS (VAT tax) from the basis of calculation 1,514 - -
Reimbursements from E&P partnership operations 912 480 331
Pension and medical benefits - retirees 889 (1,371) (1,401)
Equalization of expenses - Production Individualization Agreements 701 2 (279)
Results on disposal/write-offs of assets and on remeasurement of investment retained with loss of control 499 6,046 416
Early termination and cash outflows revision of lease agreements 276 60 -
Amounts recovered from Lava Jato investigation 155 220 457
Fines imposed on suppliers 95 260 223
Unscheduled stoppages and pre-operating expenses (1,441) (1,321) (1,282)
Voluntary Separation Plan - PDV (1,017) (198) 2
Losses with legal, administrative and arbitration proceedings (493) (1,520) (2,283)
Variable compensation program (*) (439) (643) (265)
Gains / (losses) on decommissioning of returned/abandoned areas (342) (155) 621
Gains/(losses) with Commodities Derivatives (308) (370) (416)
Reclassification of comprehensive income (loss) due to the disposal of equity-accounted investments (43) (34) -
Profit sharing - (43) (442)
Employee Career and Compensation Plan - PCR - (2) (293)
Agreement with US Authorities - - (895)
Others 40 (212) (254)
Total 998 1,199 (5,760)
(*) In 2020, it includes a US$ 84 reversal related to the provision recognized in 2019, and US$3 expense related to Directors variable compensation.

 

 

29 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
12.Net finance income (expense)
  2020 2019 2018
Finance income 551 1,330 2,381
Income from investments and marketable securities (Government Bonds) 202 558 563
Gains from signed agreements (electric sector) 79 724
Interest on petroleum and alcohol accounts 79 8 87
Other income, net 270 685 1,007
Finance expenses (6,004) (7,086) (5,675)
Interest on finance debt (3,595) (4,847) (5,920)
Unwinding of discount on lease liabilities (1,322) (1,514) (10)
Discount and premium on repurchase of debt securities (1,157) (860) (651)
Capitalized borrowing costs 941 1,332 1,814
Unwinding of discount on the provision for decommissioning costs (638) (795) (652)
Other finance expenses and income, net (233) (402) (256)
Foreign exchange gains (losses) and indexation charges (4,177) (3,008) (3,190)
Foreign exchange gains (losses) (*) (1,363) (72) (66)
Reclassification of hedge accounting to the Statement of Income (*) (4,720) (3,136) (3,315)
Pis and Cofins inflation indexation income -  exclusion of ICMS (VAT tax) from the basis of calculation 1,709
Other foreign exchange gains (losses) and indexation charges, net 197 200 191
Total (9,630) (8,764) (6,484)
(*) For more information, see notes 38.3c and 38.3a.

 

 

30 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
13.Net income by operating segment

 

Consolidated Statement of Income by operating segment            
  2020
 

Exploration

and

Production

Refining,

Transportation

& Marketing

Gas

&

Power

Corporate and other business Eliminations Total
Sales revenues 34,395 47,782 7,725 876 (37,095) 53,683
    Intersegments 33,524 865 2,455 251 (37,095)
    Third parties 871 46,917 5,270 625 - 53,683
Cost of sales (18,098) (44,011) (3,985) (832) 37,731 (29,195)
Gross profit (loss) 16,297 3,771 3,740 44 636 24,488
Income (expenses) (9,247) (2,992) (2,581) 419 (24) (14,425)
  Selling - (2,520) (2,320) (20) (24) (4,884)
  General and administrative (155) (161) (85) (689) - (1,090)
  Exploration costs (803) - - - - (803)
  Research and development (232) (11) (10) (102) - (355)
  Other taxes (478) (137) (31) (306) - (952)
  Impairment of assets (7,364) 164 36 (175) - (7,339)
  Other income and expenses (215) (327) (171) 1,711 - 998
Net income / (loss) before financial results and income taxes 7,050 779 1,159 463 612 10,063
  Net finance income (expenses) - - - (9,630) - (9,630)
  Results in equity-accounted investments (181) (437) 128 (169) - (659)
Net income / (loss) before income taxes 6,869 342 1,287 (9,336) 612 (226)
  Income taxes (2,398) (265) (393) 4,438 (208) 1,174
Net income for the period 4,471 77 894 (4,898) 404 948
Attributable to:            
Shareholders of Petrobras 4,475 111 821 (4,670) 404 1,141
Non-controlling interests (4) (34) 73 (228) (193)
  4,471 77 894 (4,898) 404 948

 

 

 

 

 

 

 

 

 

31 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

 

  2019
 

Exploration

and

Production

Refining,

Transportation

& Marketing

Gas

&

Power

Corporate and other business Eliminations Total
Sales revenues 50,462 67,538 11,493 1,221 (54,125) 76,589
    Intersegments 49,400 9,432 3,308 226 (54,125) 8,241
    Third parties 1,062 58,106 8,185 995 - 68,348
Cost of sales (27,304) (61,578) (7,713) (1,167) 52,030 (45,732)
Gross profit (loss) 23,158 5,960 3,780 54 (2,095) 30,857
Income (expenses) (4,181) (4,334) 2,580 (4,282) (26) (10,243)
  Selling - (2,164) (2,260) (31) (21) (4,476)
  General and administrative (254) (336) (134) (1,401) 1 (2,124)
  Exploration costs (799) - - - - (799)
  Research and development (394) (11) (15) (156) - (576)
  Other taxes (127) (151) (152) (189) - (619)
  Impairment of assets (1,956) (697) (194) 1 (2) (2,848)
  Other income and expenses (651) (975) 5,335 (2,506) (4) 1,199
Net income / (loss) before financial results and income taxes 18,977 1,626 6,360 (4,228) (2,121) 20,614
  Net finance income (expenses) - - - (8,764) - (8,764)
  Results in equity-accounted investments 86 (151) 103 115 - 153
Net income / (loss) before income taxes 19,063 1,475 6,463 (12,877) (2,121) 12,003
  Income taxes (6,451) (552) (2,162) 4,245 720 (4,200)
Net income from continuing operations for the period 12,612 923 4,301 (8,632) (1,401) 7,803
Net income from discontinued operations for the period - - 3 2,557 - 2,560
Net income for the period 12,612 923 4,304 (6,075) (1,401) 10,363
             
Net income attributable to shareholders of Petrobras 12,624 1,021 4,180 (6,273) (1,401) 10,151
Net income from continuing operations 12,624 1,021 4,179 (8,763) (1,401) 7,660
Net income from discontinued operations - - 1 2,490 - 2,491
Non-controlling interests (12) (98) 124 198 212
Net income from continuing operations (12) (98) 121 132 - 143
Net income from discontinued operations - - 3 66 - 69
  12,612 923 4,304 (6,075) (1,401) 10,363

 

 

32 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

 

 

  2018
 

Exploration

and

Production

Refining,

Transportation

& Marketing

Gas

&

Power

Corporate and other business Eliminations Total
             
Sales revenues 52,382 73,448 12,241 1,731 (55,164) 84,638
    Intersegments 50,052 16,655 3,701 205 (55,164) 15,449
    Third parties 2,330 56,793 8,540 1,526 - 69,189
Cost of sales (28,968) (67,011) (9,023) (1,611) 54,429 (52,184)
Gross profit (loss) 23,414 6,437 3,218 120 (735) 32,454
Income (expenses) (5,068) (3,437) (2,461) (4,662) (38) (15,666)
  Selling (80) (1,777) (1,867) (76) (27) (3,827)
  General and administrative (257) (376) (152) (1,453) (1) (2,239)
  Exploration costs (524) - - - - (524)
  Research and development (443) (11) (21) (166) - (641)
  Other taxes (115) (207) (65) (283) - (670)
  Impairment of assets (1,391) (442) (190) 18 - (2,005)
  Other income and expenses (2,258) (624) (166) (2,702) (10) (5,760)
Net income / (loss) before financial results and income taxes 18,346 3,000 757 (4,542) (773) 16,788
  Net finance income (expenses) - - - (6,484) - (6,484)
  Results in equity-accounted investments 75 362 95 (9) - 523
Net income / (loss) before income taxes 18,421 3,362 852 (11,035) (773) 10,827
  Income taxes (6,236) (1,020) (257) 2,994 263 (4,256)
Net income from continuing operations for the period 12,185 2,342 595 (8,041) (510) 6,571
Net income from discontinued operations for the period - - 15 828 - 843
Net income for the period 12,185 2,342 610 (7,213) (510) 7,414
Attributable to:            
Net income attributable to shareholders of Petrobras 12,190 2,393 482 (7,382) (510) 7,173
Net income from continuing operations 12,190 2,393 471 (7,972) (510) 6,572
Net income from discontinued operations - - 11 590 - 601
             
Non-controlling interests (5) (51) 128 169 241
Net income from continuing operations (5) (51) 124 (69) - (1)
Net income from discontinued operations - - 4 238 - 242
  12,185 2,342 610 (7,213) (510) 7,414

 

 

The consolidated amounts of intersegment sales (remaining after eliminations) relates to sales from the RT&M to BR, which is presented as discontinued operation within Corporate and other business.

13.1.Accounting policy for operating segments

The information related to the Company’s operating segments is prepared based on available financial information directly attributable to each segment, or items that can be allocated to each segment on a reasonable basis. This information is presented by business activity, as used by the Company’s Board of Executive Officers (Chief Operating Decision Maker – CODM) on the decision-making process of resource allocation and performance evaluation.

The measurement of segment results includes transactions carried out with third parties, including associates and joint ventures, as well as transactions between operating segments. Transfers between operating segments are recognized at internal transfer prices derived from methodologies that take into account market parameters and are eliminated only to provide reconciliations to the consolidated financial statements.

The Company's business segments disclosed separately are:

Exploration and Production (E&P): this segment covers the activities of exploration, development and production of crude oil, NGL (natural gas liquid) and natural gas in Brazil and abroad, for the primary purpose of supplying its domestic refineries. The E&P segment also operates through partnerships with other companies and includes holding interest in foreign entities operating in this segment.

33 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

As an energy Company with a focus on oil and gas, intersegment sales revenue refers mainly to oil transfers to the Refining, Transportation and Marketing segment, aiming to supply the Company's refineries and meet the domestic demand for oil products. These transactions are measured by internal transfer prices based on international oil prices and their respective exchange rate impacts, taking into account the specific characteristics of the transferred oil stream.

In addition, the E&P segment revenues include transfers of natural gas to the natural gas processing plants within Gas and Power segment. These transactions are measured at internal transfer prices based on the international prices of this commodity.

Revenue from sales to third parties mainly reflects services rendered relating to E&P activities, sales of the E&P’s natural gas processing plants, as well as the oil and natural gas operations carried out by subsidiaries abroad.

Refining, Transportation and Marketing (RT&M): this segment covers the refining, logistics, transport and trading of crude oil and oil products activities in Brazil and abroad, as well as exports of ethanol. This segment also includes the petrochemical operations, such as extraction and processing of shale and holding interests in petrochemical companies in Brazil.

This segment carries out the acquisition of crude oil from the E&P segment, imports oil for refinery slate, and acquires oil products in international markets taking advantage of the existing price differentials between the cost of processing domestic oil and that of importing oil products.

Intersegment revenues primarily reflect the sale of oil products for the distribution segment at market prices and the operations for the Gas and Power and E&P segments at internal transfer price.

Revenues from sales to third parties primarily reflect the trading of oil products in Brazil and the export and trade of oil and oil products by foreign subsidiaries.

Gas and Power: this segment covers the activities of logistic and trading of natural gas and electricity, transportation and trading of LNG (liquefied natural gas), generation and electricity by means of thermoelectric power plants, as well as holding interests in transporters and distributors of natural gas in Brazil and abroad. It also includes natural gas processing and fertilizers production.

Intersegment revenues primarily reflect the transfers of natural gas processed, liquefied petroleum gas (LPG) and NGL to RT&M. These transactions are measured at internal transfer prices.

This segment purchases national natural gas from the E&P segment, from partners and third parties, imports natural gas from Bolivia and LNG to meet national demand.

Revenues from sales to third parties primarily reflect natural gas processed to distributors, as well as generation and trading of electricity.

Corporate and other businesses comprise items that cannot be attributed to the other segments, as well as distribution and biofuels businesses. Corporate items comprise those related to corporate financial management, corporate overhead and other expenses, including actuarial expenses related to the pension and medical benefits for retired employees and their dependents. Distribution business reflects the interest in the associate BR Distribuidora (investments and results in equity-accounted investments), as well as the distribution of oil products abroad (South America). From 2018 to July 2019, for comparative purposes, it also includes net income from discontinued operations. Biofuels business reflects production activities of biodiesel, its co-products and ethanol.

34 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
14.Trade and other receivables
14.1.Trade and other receivables, net
  12.31.2020 12.31.2019
Receivables from contracts with customers    
Third parties 3,081 4,481
Related parties    
Investees (note 39.1) 664 794
Receivables from the electricity sector 205 334
Subtotal 3,950 5,609
Other trade  receivables    
Third parties    
Receivables from divestments (*) 1,523 1,434
Lease receivables 467 482
Other receivables 2,536 831
Related parties    
Petroleum and alcohol accounts - receivables from Brazilian Government (note 39.2) 482 304
Subtotal 5,008 3,051
Total trade receivables 8,958 8,660
Expected credit losses (ECL) - Third parties (1,528) (2,286)
Expected credit losses (ECL) - Related parties (68) (45)
Total trade receivables, net 7,362 6,329
Current 4,731 3,762
Non-current 2,631 2,567
(*) It comprises receivable from the divestment of NTS and contingent payments from the sale of interest in Roncador field.
(**) It includes amounts related to the purchase and sale of production platforms and equipment from our partners in E&P consortia

 

 

Trade and other receivables are generally classified as measured at amortized cost, except for receivables with final prices linked to changes in commodity price after their transfer of control, which are classified as measured at fair value through profit or loss, amounting to US$507 as of December 31, 2020 (US$ 357 as of December 31, 2019).

14.2.Aging of trade and other receivables – third parties
  12.31.2020 12.31.2019
  Trade receivables Expected credit losses Trade receivables Expected credit losses
Current 5,850 (130) 4,658 (142)
Overdue:        
1-90 days 205 (8) 251 (38)
91-180 days 15 (9) 24 (8)
181-365 days 42 (28) 49 (13)
More than 365 days 1,495 (1,353) 2,245 (2,086)
Total 7,607 (1,528) 7,227 (2,287)
         

 

 

35 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
14.3.Changes in provision for expected credit losses
  2020 2019
Opening balance 2,331 4,305
Additions 209 217
Write-offs (698) (1,241)
Reversals (3) -
Transfer of assets held for sale (3) (871)
Cumulative translation adjustment (240) (79)
Closing balance 1,596 2,331
  - -
Current 218 1,103
Non-current 1,378 1,228

 

 

In 2020, the additions include an increase of US$ 60 on receivables in foreign currency, resulting from the 29% exchange rate devaluation in the year ended December 31, 2020, as well as the recording of a supplementary provision arising from the effects of the COVID-19 on the economy (US$ 19).

In 2020, the write-offs primarily relate to the write-off of receivables, by a subsidiary abroad, relating to construction and renovation of platforms. In 2019, the write-offs primarily relate to the termination of a lawsuit relating to the electricity sector.

14.4.Accounting policy for trade receivables

Trade receivables are generally classified at amortized cost, except for certain receivables classified at fair value through profit or loss, whose cash flows are distinct from the receipt of principal and interest, including receivables with final prices linked to changes in commodity price after their transfer of control.

When the Company is the lessor in a finance lease, a receivable is recognized at the amount of the net investment in the lease, consisting of the lease payments receivable and any unguaranteed residual value accruing to the Company, discounted at the interest rate implicit in the lease.

The Company measures expected credit losses for short-term trade receivables using a provision matrix based on historical observed default rates adjusted by current and forward-looking information when applicable and available without undue cost or effort.

The Company measures the allowance for expected credit losses of other trade receivables based on their 12-month expected credit losses unless their credit risk has increased significantly since their initial recognition, in which case the allowance is based on their lifetime expected credit losses.

When determining whether there has been a significant increase in credit risk, the Company compares the risk of default on initial recognition and at the reporting date.

Regardless of the assessment of significant increase in credit risk, a delinquency period of 30 days past due triggers the definition of significant increase in credit risk on a financial asset, unless otherwise demonstrated by reasonable and supportable information.

The Company assumes that the credit risk on the trade receivable has not increased significantly since initial recognition if the receivable is considered to have low credit risk at the reporting date. Low credit risk is determined based on external credit ratings or internal methodologies.

In the absence of controversy or other issues that may result in the suspension of collection, the Company assumes that a default occurs whenever the counterparty does not comply with the legal obligation to pay its debts when due or, depending on the instrument, when it is at least 90 days past due.

The measurement of expected credit loss comprises the difference between all contractual cash flows that are due to the Company and all the cash flows that the Company expects to receive, discounted at the original effective interest rate weighted by the probability of default.

36 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
15.Inventories
  12.31.2020 12.31.2019
Crude oil 2,242 3,905
Oil products 1,925 2,274
Intermediate products 396 586
Natural gas and Liquefied Natural Gas (LNG) 122 173
Biofuels 30 28
Fertilizers 8 28
Total products 4,723 6,994
Materials, supplies and others 954 1,195
Total 5,677 8,189
     

 

 

In the year ended December 31, 2020, the Company recognized a US$ 375 loss within cost of sales, adjusting inventories to net realizable value (a US$ 15 loss within cost of sales in the year ended December 31, 2019) primarily due to changes in international prices of crude oil and oil products.

At December 31, 2020, the Company had pledged crude oil and oil products volumes as collateral for the Terms of Financial Commitment (TFC) signed by Petrobras and Petros in 2008, in the amount of US$ 2,750 (US$ 3,525 at December 31, 2019).

15.1.Accounting policy for inventories

Inventories are determined by the weighted average cost method adjusted to the net realizable value when it is lower than its carrying amount.

Net realizable value is the estimated selling price of inventory in the ordinary course of business, less estimated cost of completion and estimated expenses to complete its sale. Changes in sales prices after the reporting date of the financial statements are considered in the calculation of the net realizable value if they confirm the conditions existing on that reporting date.

Crude oil and LNG inventories can be traded or used for production of oil products.

Intermediate products are those product streams that have been through at least one of the refining processes, but still need further treatment, processing or converting to be available for sale.

Biofuels mainly include ethanol and biodiesel inventories.

Materials, supplies and others mainly comprise production supplies and operating materials used in the operations of the Company, stated at the average purchase cost, not exceeding replacement cost.

37 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
16.Trade payables
  12.31.2020 12.31.2019
Third parties in Brazil 2,828 2,560
Third parties abroad 3,603 2,045
Related parties 428 996
Total in current liabilities 6,859 5,601
     

 

 

17.Taxes
17.1.Income taxes and other taxes
Income taxes            
  Current assets Current liabilities Non-current liabilities
  12.31.2020 12.31.2019 12.31.2020 12.31.2019 12.31.2020 12.31.2019
Taxes in Brazil            
Income taxes 391 2,485 111 71 - -
Income taxes - Tax settlement programs - - 45 57 357 504
  391 2,485 156 128 357 504
Taxes abroad 27 8 42 148 - -
Total 418 2,493 198 276 357 504
(*) See note 20.2 for detailed information.            

 

 

Other taxes                
  Current assets Non-current assets Current liabilities Non-current liabilities (*)
  12.31.2020 12.31.2019 12.31.2020 12.31.2019 12.31.2020 12.31.2019 12.31.2020 12.31.2019
Taxes in Brazil                
Current / Non-current ICMS (VAT) 507 555 293 364 642 759 - -
Current / Non-current PIS and COFINS 340 417 2,055 2,591 544 252 37 44
Claim to recover PIS and COFINS - - 681 820 - - - -
PIS and COFINS - exclusion of ICMS (VAT tax) from the basis of calculation 1,230 - - - - - - -
CIDE 4 31 - - 41 45 - -
Production taxes - - - - 1,173 1,929 94 266

Withholding

income taxes

- - - - 106 232 - -
Others 87 31 119 153 117 189 275 225
Total in Brazil 2,168 1,034 3,148 3,928 2,623 3,406 406 535
Taxes abroad 9 17 10 11 13 18 - -
Total 2,177 1,051 3,158 3,939 2,636 3,424 406 535
(*) Other non-current taxes are classified as other non-current liabilities.

 

 

Income taxes within current assets refer mainly to tax credits resulting from the computation process of IRPJ and CSLL, in addition to the negative balance relating to 2018 and 2019.

Current and non-current ICMS (VAT) credits arise from requests for extemporaneous and overpaid tax, offset in accordance with the legislation of each state, on average within three years. They also arise on the acquisition of assets for property, plant and equipment, which are offset in a straight line over 4 years.

Current and non-current PIS/COFINS credits mainly refer to the acquisition of goods and services for assets under construction, since their use is permitted only after these assets enter into production, as well as to extemporaneous tax credits.

Production taxes are financial compensation due to the Brazilian Federal Government by companies that explore and produce oil and natural gas in Brazilian territory. They are composed of royalties, special participations, signature bonuses and payment for retention or occupation of area.

38 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
17.2.Exclusion of ICMS (VAT tax) from the basis of calculation of PIS and COFINS

In 2020, the Company obtained a favorable and definitive court decision regarding the exclusion of ICMS (VAT tax) in the basis of calculation of sales taxes PIS and COFINS, recognizing US$ 3,226 (R$ 16,764 million) as other recoverable taxes. These sales taxes credits refer to the ICMS included in the basis of calculation of PIS and COFINS, from October 2001 to August 2020, inappropriately paid during this period.

The Company recognized this credit as the realization of income was virtually certain and the inflow of economic benefits was highly probable, since: (i) the final decision in 2020 (with no possibility of appeal) constitutes a right that is no longer contingent at the date of that decision; and (ii) the measurement methodology adopted is accepted by the Federal Revenue of Brazil, resulting in an amount to be recovered by the Company.

Thus, a US$ 2,050 gain for the recovery of taxes was accounted for within other income and expenses, a US$ 1,516 gain for the inflation indexation within net finance income (expense). In addition, the Company accounted for an US$ 78 expense within other taxes and an US$ 1,097 expense within income taxes.

In 2020, the Company compensated US$ 1,857 (R$ 10,372 million) on the payment of federal taxes. As of December 31, 2020, the unused credit, updated by the SELIC interest rate, amounts to US$ 1,230 (R$ 6,392 million).

Recovery of PIS and COFINS

The Company filed civil lawsuits against the Brazilian Federal Government claiming to recover PIS and COFINS paid over finance income and foreign exchange variation gains, from February 1999 to January 2004.

The court granted to the Company, in all the lawsuits, the definitive right to recover those taxes, but it requires previous examination and approval by the court of the settlement reports (court-ordered liquidation stage). In 2017, there were a settlement reports issued in favor of the Company relating to the most significant amount to be recovered. However, final approvals by the court are still pending.

As of December 31, 2020, the Company had non-current receivables of US$ 681 (US$ 820 as of December 31, 2019) related to PIS and COFINS, which are indexed to inflation.

39 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
17.3.Tax amnesty programs – State Tax

In 2020, Petrobras adhered to state amnesty programs that resulted in the payment of US$ 359, of which US$ 347 was recognized as other taxes, US$ 29 as finance expenses, and the balance as cumulative translation adjustments.

A summary of the agreements is presented below:

State

State

Law/Decree n°

Benefits received Claimed Amount (*)

Reduction

Benefit

Amount

paid

after

benefit

RJ 9,041/2020 Reduction of 90% of interest and 90% of the fines related to tax credits 551 (230) 321
ES 4,709-R/2020 50% of tax remission, 90% of fines and interest 139 (104) 35
AL

71,800/2020

72,199/2020

Reduction of 95% of fines and interest                                                                                                                  50% of tax remission and, 90% of fines and interest 6 (5) 1
SE 40,691/2020 Reduction of 90% of fines and interest                                                                  3 (2) 1
RN 10,784/2020 Reduction of 95% of fines and interest                                                                  2 (1) 1
      701 (342) 359

(*) US$ 565 refers to previous disputes for which the likelihood of losses were deemed possible and US$ 125 refers to self-denunciation. (RJ).

 

 

 

 

State of Rio de Janeiro

On October 1, 2020, the Company’s Board of Directors approved an agreement with the tax authority of the state of Rio de Janeiro aiming at reducing fines and interest on taxes claimed by the state. The agreement, based on ICMS Agreement 51/2020 and Law RJ 9,041 / 2020, allows a 90% reduction of the amounts due as fine and interest, resulting in a disbursement by Petrobras to the state of Rio de Janeiro of US$ 321.

This agreement allowed the settlement of contingencies related to the collection of ICMS and fines in the domestic consumption operations of diesel oil used by the maritime units chartered by the Company, considering the approval, in the same legal provision, with a reduction in the tax burden in internal supplies of marine diesel oil, instead of the previous rate of 12%, reaching a definitive solution to the cause of these contingencies. The disbursement was made in installments, having been fully settled, in accordance with the 2020 Terms of Adjustment of Tax Conduct entered into with the State of Rio de Janeiro.

State of Espírito Santo

On October 1, 2020, the Board of Directors approved the adhesion to a remission and amnesty program with the State of Espírito Santo, entered into under the terms of the ICMS Agreement 146/2019 and Decree 4,709-R / 2020, payment of US$ 35 in October 2020, to settle tax claims arising from differences in the appropriation of ICMS credits on property, plant and equipment and from differences in ICMS in oil and oil products operations. In addition, the presumed ICMS credit system was implemented, based on the ICMS the agreement, providing a definitive solution to this dispute.

17.4.Reconciliation between statutory income tax rate and effective income tax rate

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

40 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

 

  2020 2019 2018
Net income before income taxes (226) 12,003 10,827
Nominal income taxes computed based on Brazilian statutory corporate tax rates (34%) 77 (4,081) (3,681)
·    Tax benefits from the deduction of interest on capital distribution (16) 728 553
·    Different jurisdictional tax rates for companies abroad 1,874 1,056 355
.     Brazilian income taxes on income of companies incorporated outside Brazil (*) (743) (175) (41)
·    Tax incentives (9) 443 74
·    Tax loss carryforwards (unrecognized tax losses) (428) (682) (484)
·    Agreement with US authorities - - (293)
·    Non-taxable income (non-deductible expenses), net (**) (280) (1,556) (780)
·     Expenses with post-employment medical benefits (***) 559 (417) (367)
·     Results of equity-accounted investments in Brazil and abroad 49 53 184
·    Others 91 431 224
Income taxes expense 1,174 (4,200) (4,256)
Deferred income taxes 1,743 (2,798) (370)
Current income taxes (569) (1,402) (3,886)
Total 1,174 (4,200) (4,256)
       
Effective tax rate of income taxes 519.5% 35.0% 39.3%
(*) It relates to Brazilian income taxes on earnings of offshore investees, as established by Law No. 12,973/2014.
(**) It includes provisions for legal proceedings.
(***) This plan was revised in 2020, as set out in note 19.5.

 

 

17.5.Deferred income taxes - non-current

The changes in the deferred income taxes are presented as follows:

  2020 2019
Balance at January 1 (372) 2,026
Recognized in the statement of income for the period 1,743 (2,798)
Recognized in the statement of income of discontinued operation - (612)
Recognized in shareholders’ equity 5,564 1,617
Cumulative translation adjustment (623) 58
Use of tax credits (60) (329)
Transfers to held for sale 4 (276)
Others - (58)
Balance at December 6,256 (372)
Deferred tax assets 6,451 1,388
Deferred tax liabilities (195) (1,760)
Balance at December 6,256 (372)
     

 

 

The composition of deferred tax assets and liabilities as of December 31 is set out in the following table:

Nature Realization basis 2020 2019
Exploration and decommissioning costs Depreciation, amortization and write-offs of assets (3,205) (5,508)
Impairment Amortization, impairment reversals and write-offs of assets 6,626 6,280
Others Depreciation, amortization and write-offs of assets (8,690) (9,868)
Loans, trade and other receivables / payables and financing Payments, receipts and considerations 3,913 1,349
Finance leases Depreciation 1,190 189
Provision for legal proceedings Payments and use of provisions 664 782
Tax loss carryforwards 30% of taxable income compensation 2,501 2,511
Inventories Sales, write-downs and losses 158 630
Employee Benefits Payments and use of provisions 2,882 3,706
Others   217 (443)
Balance at December 31   6,256 (372)
Deferred tax assets   6,451 1,388
Deferred tax liabilities   (195) (1,760)
Balance at December 31   6,256 (372)

 

41 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
17.6.Timing of reversal of deferred income taxes

Deferred tax assets were recognized based on projections of taxable profit in future periods supported by the Company’s 2021-2025 Strategic Plan, aiming at the maximization of returns on capital employed, reduction of cost of capital and search for low costs and efficiencies.

Management considers that the deferred tax assets will be realized to the extent the deferred tax liabilities are reversed and expected taxable events occur based on its 2021-2025 Strategic Plan.

The estimated schedule of recovery/reversal of net deferred tax assets (liabilities) as of December 31, 2020 is set out in the following table:

  Assets Liabilities
2021 2,257 49
2022 975 21
2023 764 20
2024 15 19
2025 14 44
2026  and thereafter 2,426 42
Recognized deferred tax assets 6,451 195

 

 

In addition, at December 31, 2020, the Company has tax loss carryforwards arising from offshore subsidiaries, for which no deferred taxes were recognized.

  Assets Liabilities
Brazil 35 2
Abroad 1,369 -
Unrecognized deferred tax assets 1,404 2
Total 7,855 197

 

 

These tax losses arose mainly from oil and gas exploration and production and refining activities in the United States of US$ 1,295 (US$ 1,346 as of December 31, 2019).

An aging of the unrecognized deferred tax assets from companies abroad is set out below:

  2026 - 2028 2029 - 2031 2032 - 2034 2035 -2037 Undefined expiration Total
Unrecognized deferred tax assets 205 708 320 62 74 1,369

 

 

17.7.Accounting policy for income taxes

Income tax expense for the period includes current and deferred taxes, recognized in the statement of income of the period, except when the tax arises from a transaction or event which is recognized directly in equity. Income tax expense comprises current and deferred taxes based on the rates of 25% for income tax (IRPJ) and 9% for social contribution on net income (CSLL), and the offsetting of the carryforward of credit losses and negative basis of CSLL, limited to 30% of taxable income for the year. Since 2015, income tax expenses on profits arising from subsidiaries abroad are recognized as established by Law No. 12,973 / 2014.

17.7.1.Current income taxes

Current income taxes are computed based on taxable profit for the year, determined in accordance with the rules established by the taxation authorities, using tax rates that have been enacted or substantively enacted at the end of the reporting period.

Current income taxes are offset when they relate to income taxes levied on the same taxable entity and by the same tax authority, when there is a legal right and the entity has the intention to set off current tax assets and current tax liabilities, simultaneously.

42 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 
17.7.2.Deferred income taxes

Deferred income taxes are recognized on temporary differences between the tax base of an asset or liability and its carrying amount. They are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets are generally recognized for all deductible temporary differences and carryforward of unused tax losses or credits to the extent that it is probable that taxable profit will be available against which those deductible temporary differences can be utilized. When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, a deferred tax is recognized to the extent that it is probable that the entity will have sufficient taxable profit in future periods, based on projections approved by management and supported by the Company’s Strategic Plan.

Deferred tax assets and deferred tax liabilities are offset when they relate to income taxes levied on the same taxable entity, when a legally enforceable right to set off current tax assets and current tax liabilities exists and when the deferred tax assets and deferred tax liabilities relate to taxes levied by the same tax authority on the same taxable entity.

43 

NOTES TO THE FINANCIAL STATEMENTS

PETROBRAS

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

 

 

18.Employee benefits
  12.31.2020 12.31.2019
Voluntary Severance Program (PDV) 900 140
Employees variable compensation program 522 655
Accrued vacation pay 470 660
Salaries and related charges 204 212
Profit sharing 4 16
Total 2,100 1,683
Current 1,953 1,645
Non-current 147 38

 

 

18.1.Voluntary Severance Programs

As of December 31, 2020, the Company has seven voluntary severance programs (PDV) and one Incentive Retirement Program (PAI), whose enroll