Exploration Expenses

Exploration expenses increased R$47.4 million year-on-year. This variation was primarily the result of the intensification of seismic campaigns in the Parnaíba Basin and Colombia.

General and Administrative Expenses

General and administrative expenses decreased R$21 million year-on-year, driven by the R$10 million reduction in expenses with profit sharing.

Dry and Sub-commercial Wells

In 3Q12, the Company posted an expense of R$460.2 million with dry wells and sub-commercial areas. Of this amount, R$213.2 million account for previously capitalized expenses in the BM-S-29 block, which was returned in August of 2012. The remaining balance refers to dry or sub-commercial wells.

Foreign Exchange Expense

In 3Q12, the Company posted net foreign exchange expenses of R$366.1 million, compared to a net expense of R$4.2 million in 3Q11, for an increase of R$361.9 million.

This foreign exchange expense is almost entirely non-cash and due to a net foreign exchange exposure of US$2.1 billion. Despite the loss in U.S. dollars exceeding income, the Company opted not to contract hedge instruments for this non-cash exposure as it plans to settle this dollar-denominated liability through revenue from oil sales to be booked in the same currency, production of which began on January 31, 2012. Thus, the net foreign exchange exposure will be protected by a natural hedge to be generated by oil sales.

Financial Result

The R$106.9 million financial expense in 3Q12 is explained by: (a) the un-capitalized interest on financing of R$302.9 million, partially offset by (b) gains on financial investments of R$194.7 million; and (c) other net financial income of R$1.3 million.

Cost of Products Sold

The R$124.6 million cost of goods sold incurred with the oil sales after the EWT is broken down as: (a) expenses with leasing of R$52.7 million; (b) O&M services of R$28.1 million; (c) logistics of R$27.8 million; (d) royalties of R$14.8 million; and (e) others of R$1.2 million.