2016 annual sustainability report -...

2016 ANNUAL SUSTAINABILITY REPORT

MAIN INDICATORS

MESSAGE FROM THE MANAGEMENT

MISSION, VISION AND VALUES

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OUR MANAGEMENT STYLE

Profile

People

Intangible assets

Corporate governance

Risk management

Management & strategy

Capital expenditures

Prospects

OUR WAY OF WORKING

OUR RESULTS

OUR FUTURE PG.56

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ABOUT THIS REPORT

GRI-G4 CONTENT INDEX

CORPORATE INFORMATION

CREDITS

Innovation

Operation and portfolioPG.30

Social performance

Environmental performance

Operating performance

Economic and financial performance

Value added statement - VAS

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153

189

477

16

16

16

94

-75

496

14%

44%

4%

38%

192

223 215

486

15

15

1513

13

13

195 503

83

123

462

14

14

1412

12

12

R$2.1 MILLION INVESTED IN ENVIRONMENTAL PROTECTION IN 2016

79 HOURS OF TRAINING PER WORKFORCE MEMBER IN 2016

39.5 %EBITDA MARGIN IN 2016, UP FROM NEGATIVE MARGIN IN 2015

NET INCOME R$ MILLION

NET REVENUE R$ MILLION

EBITDAR$ MILLION

45%55%

(BARRELS OF OIL EQUIVALENT) AT THE CLOSE OF DECEMBER 2016.

84.0 million boe*

MAIN INDICATORS

VALUE ADDED DISTRIBUTION

807

16

919982

1513

9731,001

1412

GAS PRODUCTIONIN MILLIONS OF M3

TOTAL

R$ 400

Million

Workforce members

Government

Interest

Shareholders

128 WORKFORCE

MEMBERS

* 2P certified

QGEP’S TOTAL RESERVE AMOUNTED TO

42016 ANNUAL SUSTAINABILITY REPORTQUEIROZ GALVÃO EXPLORAÇÃO E PRODUÇÃO

MAIN INDICATORS

FINANCIAL INDICATORS 2016 2015 2014 2013 2012

(R$ million)

Gross revenue 596.2 623.6 634.1 612.8 586.1

Net revenue 476.5 496.2 503 486.1 462.3

Gross profit 235.7 243.3 260.1 276.2 279.5

Gross margin (%) 49.5 49 51.7 56.8 60.5

Net income 152.9 93.6 194.8 192.2 82.5

Net margin (%) 32.1 18.8 39.0 39.5 17.8

EBITDA 188.5 -74.9 214.7 222.9 122.9

EBITDA margin (%) 39.5 -15.1 42.7 45.9 26.6

EBITDAX 188.3 273 286.3 271.4 285.1

EBITDAX margin (%) 39.5 55 56.7 55.8 61.7

Gross debt 359.7 369.7 250.9 167.9 -

Net debt -977.9 -910.3 -877.7 -837.8 -952.3

Net value added 339 34.7 336.5 352.8 243.3

Total assets 3,563.4 3,430.3 3,232.2 3,039.3 2,434.00

Shareholders’ equity 2,779.6 2,689.2 2,590.00 2,409.00 2,227.8

CAPEX (US$ million) 53 115 125 193 87

OPERATING INDICATORS

Gas production (MM m3) 807.2 919.2 973.1 982.3 1,011

Total reserves (million boe) – 2P certified* 84.0 88.3 95.9** 45.2 51.5

CAPITAL MARKET 2016 2015 2014 2013 2012

# of shares traded (R$ thousand)*** 71,575.16 71,577.60 79,742.00 79,742.00 79,742.00

Trading volume (R$ million)**** 4.3 5.8 5.7 7.5 9.3

Net earnings per share (R$) 0.59 0.36 0.64 0.74 0.31

Dividend yield (%) 2.814259 2.572899 2.083333 1.5387014 0.000023

Market cap (R$ billion) 1.3 1.5 1.9 2.6 3.5

Stock price (R$) 5.33 5.83 7.20 9.78 13.12

# of shares 265,806,905 265,806,905 265,806,905 265,806,905 265,806,905

Free float 71,575,162 71,786,394 71,786,394 74,031,751 76,152,070

Treasury shares 7,954,632 7,954,632 7,954,632 5,709,275 3,588,956

# of shareholders***** 1,807 1,815 2,288 2,566 3,716

SOCIAL AND ENVIRONMENTAL INDICATORSWorkforce members 128 131 157 110 72

% female 45 46 41 41 45

Contractors and temps 18 22 27 34 17

Training (hours) 10,106.9 11,590.0 9,806.5 6,122.0 5,645.1

Frequency of accidents with lost workdays 0 0 0 0 0,50%

Environmental protection expenditures and investments (R$ million)

2.1 0.2 2.7 1.6 0.2

*Considering 2P reserves certified by GCA for the Manati and Atlanta Fields**Updated after certification on December 31, 2014***Numbers revised to reflect the cancellation of Treasury shares****Corresponding to the average daily trading volume*****Updated annually on the date of the Annual General Meeting

G4-9


around a strategy of maintaining a sound financial health, operational safety and sustainable management.

Our growth has kept pace with the market’s development, and we expect the share of natural gas in the global energy mix to increase in the coming years. In fact, we believe natural gas will play a key role in the transition to a low-carbon economy.

Despite the expansion of renewable energy generation, we do not believe the share of oil in the global energy mix will decrease significantly at least in the next 20 years due to the downward trend in coal consumption. Therefore, we expect a sustainable equilibrium price to be reached since the market is increasingly diversified and competitive. In addition, it is more and more important for international oil prices to rally, driven by the measures to be adopted by major producers.

In Brazil, some regulatory changes

MESSAGE FROM THE CHAIRMAN

OF THE BOARD OF DIRECTORS

WE HAVE SUCCEEDED IN FORMING A STRONG, COMPETENT

COHESIVE TEAM BOTH TO CONDUCT OUR OPERATIONS AND TO TACKLE THE GLOBAL

CHALLENGES FACING THE INDUSTRY AND POSED BY BRAZIL’S POLITICAL AND ECONOMIC SITUATION

We were aware oil exploration and production required shareholders to change their expectations about the maturity of their investments back when we founded QGEP. Based on our diligent approach to asset management and selection, we have been seeking a balance between cash generation and investments to develop our portfolio. Another key point was the need to build a strategic team of great potential and with a systemic vision. Throughout these years, we have succeeded in forming this strong, competent cohesive team both to conduct our operations and to tackle the global challenges facing the industry and posed by Brazil’s political and economic situation. This motivated, committed team, as well as our values and beliefs, allows us to safeguard QGEP’s position as the main independent Brazilian exploration and production company, structured

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and positive signs should help make the Brazilian market more attractive and increase the country’s competitiveness, thus leading to renewed investments in the oil and gas chain, with the presence of multiple companies exploring the pre-salt layer. Some important measures have yet to be taken, and we are optimistic and confident a dialogue will allow the government, the regulatory body and society to reach a solution soon.

We continue playing our part in the development of the oil industry and Brazil by working in a sustainable manner and improving our corporate governance practices. We refuse to compromise on our very strict risk management and safety practices.

We seek to contribute to Brazil’s environmental and social performance by participating actively in joint technical studies with other operators to collect environmental data about the Brazilian coast and coastal islands, as well as the marine fauna, and providing this information to Government Agencies and society in a transparent manner. We believe we are in a good position since we have a balanced, diversified portfolio, projects in different stages and assets of great potential. An example is Carcará, which has a new operator and should soon have a new development agenda.

On the other hand, major challenges will require our team’s dedication in the short, medium and long term. Therefore, we are focused on

overcoming those challenges to start first oil production from the Atlanta Field as soon as possible.

We are on the path to sustainable growth, based on our cautious decisions and firm action, and driven by the dedication of our team, which is focused on improving efficiency continuously. As a result, we remain confident in the development of Brazil’s oil and gas industry.

Antônio Augusto de Queiroz GalvãoChair of the Board of Directors


MESSAGE FROM THE CHIEF

EXECUTIVE OFFICER

We dealt resiliently with the difficulties the recession in Brazil created for the oil and gas industry throughout 2016. To that end, we continued managing capital conservatively, sought to increase efficiency, focused mainly on investing and seized the opportunities to strengthen our portfolio. This concentrated effort, in keeping with our long-term strategy, and the versatility of our engaged team allowed us to achieve positive results in a challenging year.

Cash generation was led by our operations in the Manati Field, which protect us from oil price fluctuations since gas sale prices are adjusted for the Brazilian inflation and are not subject to changes in oil prices. Gas consumption fell throughout Brazil due to the slowdown during the year. However, the 12% drop in production was partially offset by the adjustment in the sale price of gas from Manati, which produced R$476.5 million in revenue in 2016, down 4% year-over-year.

Still on the issue of our operations, the arrival of FPSO Petrojarl I at the

Atlanta Field was postponed to late 2017. QGEP and the charter company are discussing measures to mitigate the effects of this delay; however, the Early Production System (EPS) is ready to produce first oil in early 2018.

The local and global market challenges have impacted some of QGEP’s shareholders, leading even to judicial reorganizations. As a result, we took over additional stakes in three exploration blocks in the Foz do Amazonas and Pará-Maranhão basins and are seeking farm-out partners. This will reduce our exposure and need for investments.

In this regard, the significant changes in Carcará, currently our asset with the greatest known potential, will boost the development of the area and make our schedule more reliable. The Carcará discovery covers both Block BM-S-8 and the adjacent area to the north, which should be part of the next ANP Bidding Round, scheduled for the second half of the year and considered an important step to develop Carcará.

A signatory to the Global

A CONCENTRATED EFFORT, IN KEEPING WITH OUR LONG-TERM STRATEGY, AND THE VERSATILITY

OF OUR ENGAGED TEAM ALLOWED US TO ACHIEVE POSITIVE RESULTS

IN A CHALLENGING YEAR


Compact since 2011, QGEP seeks to promote sustainability in Brazil by adopting sustainable practices in its management model. An important initiative was the PPLC [Projeto de Proteção e Limpeza da Costa, or Coast Protection and Cleaning Project], which involved creating a georeferenced database about the entire Brazilian coast jointly with other companies operating in Brazil. To complement the PPLC, we entered into a technical cooperation agreement with the Ibama [Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis, or Brazilian Institute of Environment and Renewable Natural Resources] and IBP [Instituto Brasileiro de Petróleo, Gás e Biocombustíveis, or Brazilian Institute of Oil, Gas and Biofuels] in 2016 to undertake the project to map all the coastal islands and Projeto de Proteção à Fauna [Wildlife Protection Project], jointly referred to as Mapeamento Ambiental para Resposta

à Emergência no Mar [Environmental Mapping for Emergency Response at Sea]. In the Brazilian Equatorial Margin, we are also carrying out Projeto Costa Norte [North Coast Project], a research and development initiative, jointly with research institutions. The purpose is to assess the efficiency of using computational methods to model the spread of pollutants along the coast and river mouths of the Amazon Region, mainly in the area including the Pará-Maranhão Basins and the mouth of the Amazon River. As usually, QGEP is undertaking those projects jointly with other industry companies to improve oil and gas exploration techniques, exchange information, strengthen ties with society and make those initiatives more feasible by sharing costs. In late 2016, the government indicated the rules for the industry may be streamlined in Brazil. The outlook is promising for independent companies, like ours, due to the signs of an economic rebound

and the government’s effort to make more flexible the regulations for local content, pre-salt exploration and REPETRO [regime aduaneiro especial de exportação e importação de bens destinados à exploração e à produção de petróleo e gás natural, or special customs procedure for exporting and importing goods for oil and natural gas exploration and production]. This is mainly because we will be able to have excellent partners, eager to exploit the pre-salt oil; in addition, these changes tend to make the Brazilian industry more competitive. We believe this is a great opportunity for QGEP, a solid company with an outstanding technical staff.

We thank our team for its effort, our partners for their commitment and our shareholders for their trust.

Lincoln Rumenos GuardadoChief Executive Officer

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MissionTo operate with safety, in an ethical and sustainable manner, in the exploration and production of oil and gas, obtaining results and contributing to the development of the areas where we operate, respecting the needs of all our stakeholders.

ValuesWork

Reliability

Quality

Loyalty

VisionTo grow consistently in order to be among the three largest Brazilian companies producing oil and gas by 2020, and to be recognized by society for its transparent and responsible management.

OUR MANAGEMENT

STYLE I believe the Company’s growth

is based, from a technical point of

view, on using specific knowledge

to optimize the value of its portfolio

and, just as important, on training,

and sharing our experience with, our

new talents. That is why coming to

work every day is a great pleasure even after

almost forty years in the field. Commitment must

serve as the basis for all our actions, whether as

professionals or as citizens. This is the only way

we’ll make a difference for Brazil and coming

generations – by helping build a fairer, happier and

more sustainable society.

Paulo Sérgio Rocha | Reservoir Manager

PROFILE

QGEP PARTICIPAÇÕES S.A. IS ONE OF THE MAIN

INDEPENDENT BRAZILIAN OIL AND GAS EXPLORATION AND

PRODUCTION COMPANIES, WITH FOCUS ON DEEP AND

ULTRA-DEEP WATERS.

G4-3 | G4-4 | G4-6 | G4-7

As a participant in the UN Global Compact – one of the main business engagement initiatives promoting the adoption of principles on human rights, labor, environment and anti-corruption – QGEP follows the best transparency practices and respects the communities in the vicinity of its locations of operation. The Company focuses primarily on safety and environmental issues. In fact, it is certified to OHSAS 18001 (Occupational Health and Safety) and ISO 14001 (Environmental Management).

NATIONWIDE PRESENCE: PRESENT ALL ALONG THE

BRAZILIAN COAST, WE OPERATE IN THE PRE-SALT EXCLUSION ZONE OF THE

SANTOS BASIN AND IN THE EQUATORIAL MARGIN, A

BORDER AREA WITH HIGH EXPLORATORY POTENTIAL.

R$ 476.5million net revenue in 2016

QUEIROZ GALVÃO GROUP OPERATES IN THE CONSTRUCTION,real estate development, environmental engineering, and naval and offshore oil & gas industries.

Present in over

15 countries in South America, the Caribbean and Africa

PORTFOLIO COMPRISED OF 14

CONCESSIONS

Queiroz Galvão Group

QGEP is part of the Queiroz Galvão Group, which has been in business for over 60 years in Brazil and other countries, and has over three decades’ experience in the oil and gas value chain.

For further information, please go to www,grupoqueirozgalvao,com,br

QGEP operates under 14 concessions a uniquely diverse

portfolio of oil and gas production, development and exploration assets in eight of the main

offshore basins along the Brazilian coast. With extensive experience in the Brazilian and international markets, QGEP’s technical team provides expert support for the

Company.


Oil & gas exploration and production is the core business of QGEP, which operates only in offshore fields along the Brazilian coast.

OPERATIONS AND MARKETS

Our experienced, skilled professionals have to evaluate the exploration areas by using sophisticated (seismic) technology before exploration and production begin. They conduct geological and geophysical studies to identify the best areas and opportunities for development. They assess the well drilling conditions only after these studies. We have to obtain an authorization from ANP [Agência Nacional do Petróleo, Gás Natural e Biocombustíveis, or Brazilian National Agency of Petroleum, Natural Gas and Biofuels], as well as specific environmental and federal permits, to perform each stage of our activities, from the acquisition of seismic data to oil and/or gas production.

Entailing high risks and requiring sizable investments, exploration and production usually involve a consortium of companies. In Brazil, companies acquire concessions to explore and produce oil and gas in specific blocks for a fixed period at ANP’s bidding rounds or through farm-in agreements (total or partial transfer).

TIMELINE

QGEP Participações S.A. is established to concentrate the Queiroz Galvão Group’s E&P activities.

We take over a 100% stake in the exploration blocks in the Foz do Amazonas and Pará-Maranhão Basins.

Valor 1000 ranks us first among Oil and Gas companies. We acquire two blocks in the Sergipe-Alagoas Basin at the 13th ANP

Bidding Round. We drill a well and carry out two tests in Carcará. We lease equipment

for the Atlanta Field and enter into a contract to sell the Atlanta oil to Shell. We open a compression station in the Manati

Field and sign an addendum to the gas sales contract with Petrobras.

We drill, complete and test two horizontal wells in the Atlanta Field (BS-4), in the Santos Basin. We charter Teekay’s FPSO Petrojarl I for use in the Atlanta EPS. We are certified to OHSAS 18001 and ISO 14001.

We acquire eight blocks at the 11th ANP Bidding Round. We start drilling

in the Atlanta Field.

We discover oil in Carcará (10% stake), in Block BM-S-8, one of the largest oil columns in the Brazilian pre-salt layer (471 m). We find light oil (31° API) in reservoirs at a depth of 5,750 m.We raise US$950 million through our IPO

(the largest in the year) and are listed on BM&FBovespa’s Novo Mercado segment.

We start drilling in Block BM-J-2 (100% stake). We acquire stakes in Blocks

BM-S-8 and BS-4, both in the pre-salt exclusion zone of the Santos Basin.

2016

2014

2012

2010

2015

2013

2011


PEOPLE

WHAT SETS US APART IS THE TECHNICAL SKILLS

OF ALL OUR PEOPLE

The improvements in recent years in the processes managed by our Human Resources Department (training indicators, management, schedules, settings, programs, etc.) have garnered great attention; indeed, they were highlighted as a positive aspect by our independent auditors in December 2016.

Seeking to focus increasingly on goals, we conducted the GPTW (Great Places to Work) Organizational Climate Survey for the first year to determine our strengths and weaknesses, and provide input to bring management even closer to our employees.

Based on the findings, we and the GPTW Institute offered all our executives a Leadership Development workshop designed to help them improve their coach leadership skills. We addressed topics such as efficient leadership, communication, feedback, and clarity between managers

G4-10 | G4-11 | G4-53

QGEP attributes the basis of its growth structure to its cohesive

results-oriented team. We greatly value knowledge and expert

skills, crucial for our operations. Therefore, we invest continuously in training and create teams with a wide range of skills to encourage our professionals to share their

experiences.

128 employees,

All employees are covered by the Collective Bargaining Agreement and are invited to participate in the process determining the annual salary adjustment. The agreement is approved at a meeting called by the union.

all of whom worked full time and under the CLT (Consolidation of Labour Laws) system.

We had in 2016


Training Programs

We developed a program in which workforce members from different departments and technical experts gather every week to discuss matters relevant to our operations. The purpose is to demystify certain details of E&P activities and improve our participants’ knowledge of the oil industry and our operational projects. There were 11 sessions attended by 70% of our workforce during the year.

EMPLOYEES BY GENDER

44.5%

55.5%

Female Male

TOTAL EMPLOYEES BY GENDER AND REGION

Southeast

Female Male

Northeast

71

57

70

56

and their teams in three sessions attended by six groups.

Maintaining our workforce, a key asset for our long-term survival, was one of our priorities in 2016 despite the financial challenges facing us during the year. This shows how much we value our people.

Private Pension PlanG4 - EC3

We invested over R$1.3 million in 2016 in the obligations established by our benefit plan. All the plan liabilities are covered by the assets earmarked for this purpose. All employees learn about the rules of our Private Pension Plan during their integration process and may or may not participate in it. We match officers’ and other employees’ contributions respectively up to 6.5% and 4% of their salaries.

The improvements in the processes managed by our Human Resources Department were highlighted as a positive aspect of QGEP’s management by our independent auditors in December 2016.

1

1


INTANGIBLE ASSETS

AN IMPRESSIVE TRACK RECORD, EXTENSIVE

EXPERIENCE AND SOUND FINANCIAL HEALTH – OUR

HALLMARKS

17 %WITH A DOCTOR’S OR MASTER’S DEGREEProminent professionals in their fields, 17% of our employees have a Doctor’s or Master’s degree.

We have highly-skilled professionals with extensive experience acquired by developing processes, techniques and technologies to adapt our operations to our business needs, mainly in the case of E&P in deep and ultra-deep waters. We combine our professionals’ expertise with cutting-edge technologies available in the market to develop our proprietary, customized technique. Therefore, we stand out in the market, improve intelligence within the organization

TrademarkQGEP is part of the Queiroz Galvão Group, which has been operating

in different industries, such as construction, real estate development, environmental engineering, and naval and offshore E&P, for over 60 years.

Our management model and corporate governance practices ensure our

operational and strategic independence.

Knowledge Management

and establish a benchmark for the industry. For example, we successfully overcame major technical

challenges in drilling two horizontal wells in the Atlanta Field, acquired through a farm-in agreement.

LISTED ON NOVO MERCADO

A PARTICIPANT IN THE UN GLOBAL COMPACT

OWN TECHNICAL STAFF

Sound financial

health

Expertise

GovernanceCollaboration

with the industry

Sustainable management

16QUEIROZ GALVÃO EXPLORAÇÃO E PRODUÇÃO

Recognition from industry associations

QGEP as a whole – including all its different areas – works continuously to adopt the best practices and go beyond the requirements when conducting studies and diagnostic assessments, and preparing licensing processes. Having a close relationship with industry associations such as the IBP [Instituto Brasileiro de Petróleo, Gás e Biocombustíveis, or Brazilian Institute of Oil, Gas and Biofuels] and participating in Workgroups (WGs) with other companies help us achieve recognition. Sharing ideas, studies and information provides a convergent view of the industry and complements other studies, thus making it easier for us to position ourselves in the industry.

Our recent effort to study the ecosystems of our locations of operation in great detail is a major contribution to Brazil and shows how committed we are to promoting the sustainable development of society by preserving the environment and fully respecting local communities. This effort involves mainly the JAPI Project (comprised

of original studies in Southern Bahia State) and the Marem Project (Coast Protection and Cleaning Project, including mapping coastal islands and the Wildlife Protection Project, conducted under a technical cooperation agreement between Ibama and IBP –learn more about it in Biodiversity).

PROJETO JAPI

Respect for society



CORPORATE GOVERNANCE

TOOLS ARE IMPORTANT, BUT IT IS PEOPLE THAT ENSURE GOOD

GOVERNANCE

The Ethics, Governance and Sustainability Committee is an arm of the Board of Directors intended to help ensure our operations are conducted in an ethical, legal and sustainable manner. It monitors ethical conduct, prepares the guidelines of our Compliance Program and focuses heavily on QGEP’s good governance. Directly involved in Sustainability management, it hired an independent consulting firm to outline a work plan and direct QGEP’s initiatives throughout 2016.

G4-34 | G4-35 | G4-36

OWNERSHIP STRUCTURE

G4-17Individuals

Queiroz Galvão S.A. FIP Quantum

QGEP Participações S.A.

Queiroz Galvão Exploração e Produção S.A.

QGEP Internacional GmbH

QGEP Netherlands B.V.

Atlanta Field B.V.

Free Float

100% 100%

63% 7% 30%

100%100%

30%

100%

We also improved our internal controls in 2016 by adopting procedures for contracting suppliers in the supplies and financial departments, and started managing procurement and inventory processes more strictly.

We worked hard to improve our processes, systems, internal controls, regulations and policies in 2016, in an

ongoing maturation and evolution process. We set up a Compensation and Succession

Committee, in addition to the Ethics, Governance and Sustainability Committee, established in late 2015. Those are strategic

activities in which we have to adopt the best practices to make the Company more competitive and sustainable.


BOARD OF DIRECTORS

G4-37 | G4-38 | G4-39 | G4-40 | G4-43 | G4-44 |

G4-45 | G4-46 | G4-47 | G4-49

The Board of Directors is the decision-making body responsible for establishing QGEP policies, including long-term strategies. Nominated based on their professional backgrounds and qualifications, the Directors are elected by the shareholders at an Annual General Meeting. The Board also oversees the Executive Board’s activities. It is currently composed of seven members – two of whom are independent – who serve a two-year term of office and may be re-elected. The Board follows a schedule of discussions throughout the year. The discussion topics are indicated by the Executive Board. The Board also deals with concerns about the Company’s business conduct expressed through internal processes adopted by the Executive Board. Stakeholders can send us information through our

• Antônio Augusto de Queiroz Galvão Chair of the Board of Directors

• Leduvy de Pina Gouvêa Filho Member of the Board of Directors

• José Augusto Fernandes Filho Member of the Board of Directors

• José Luiz Alquéres Independent Member of the Board of Directors

• Luiz Carlos de Lemos Costamilan Independent Member of the Board of Directors

• Ricardo de Queiroz Galvão Member of the Board of Directors

• Maurício José de Queiroz Galvão Member of the Board of Directors

The résumés of all Board members are available on QGEP’s Investor Relations website.

COMPOSITION OF THE BOARD OF DIRECTORS

In office from 04/14/2016 to 04/14/2018

communication channels, such as specific e-mail addresses (institutional, investor relations, for block issues and Canal Confidencial [Confidential Channel]). All communications are examined by the people in charge and reported to the Executive Board and the Board of Directors as needed. The Board deals with the contents of these communications so as to manage the related impacts and

risks more efficiently. The Board of Directors approves all the policies governing QGEP’s business by analyzing the issues submitted by the Executive Board. The purpose of adopting those policies is to mitigate and manage the risks identified in our internal processes. The Board follows a strategic plan, which is updated regularly, for conducting the Company’s business. This strategic plan covers all the impacts on, and risks to, the business, which are managed through specific measures and policies addressing economic, environmental and social issues. In fact, the Board of Directors assesses the Company’s risks continuously.

In 2016, the Board of Directors approved hiring an independent consulting firm to provide support for a self-assessment of all Directors and Officers during 2017. The idea is

to improve the Board’s efficiency. We will be determining how often this self-assessment will be made after completing the first one.

QGEP’s Board of Directors is currently composed of seven members – two of whom are independent – who serve a two-year term of office and may be re-elected.


STATUTORY AUDIT COMMITTEE

Our Statutory Audit Committee has been operating on a non-permanent basis since 2014. It is composed of three sitting members and an equal number of alternates, each of whom serve a one-year term and may be re-elected if someone requests the Committee be appointed again. The Statutory Audit Committee meets under terms of the law as needed and audits the Company’s financial statements. The Annual General Meeting held on April 12, 2016 decided to establish the Statutory Audit Committee and the Annual General Meeting held on April 14, 2017 decided to maintain it for one more year.

Alternate members:• Nelson Mitimasa Jinzenji• Gil Marques Mendes • Flávio Jarczun KacThe résumés of all the members of the Statutory Audit Committee are available on QGEP’s Investor Relations website.

Sitting Members:• Sérgio Tuffy Sayeg • José Ribamar Lemos de Souza• Carlos Eduardo Parente de Oliveira Alves

In office from 04/19/2017 to 04/19/2018

Sitting Members:• Sérgio Tuffy Sayeg • José Ribamar Lemos de Souza• Axel Erhard Brod

COMPOSITION OF THE STATUTORY

AUDIT COMMITTEE

Alternate members:• Nelson Mitimasa Jinzenji• Gil Marques Mendes • William Bezerra Cavalcanti Filho

In office from 04/14/2016 to 04/19/2017

EXECUTIVE BOARD

G4-38

The Executive Board conducts the business, and executes the policies and guidelines set by the Board of Directors. Its four members are appointed by the Board of Directors for two-year terms and may be re-elected. Executive Officers representing the Company at General Meetings of companies controlled indirectly by a QGEP company must follow a voting guidance in compliance with the Company’s competence boundaries and values. It is up to the Company’s executives to escalate competences and execute any corporate documents as needed.

QGEP’s Executive Office. From left to right: Lincoln Rumenos Guardado, Chief Executive Officer and Exploration Officer; Paula Costa Côrte-Real, CFO and Investor Relations Officer; and Danilo Oliveira, Production Director.

• Lincoln Rumenos Guardado Chief Executive Officer and Exploration Officer

• Paula Costa Côrte-Real Chief Financial Officer and Investor Relations Officer

• Danilo Oliveira Production Officer

All Officers’ résumés can be found on QGEP’s Investor Relations website.

In office from 04/14/2016 to 04/14/2018

COMPOSITION OF THE EXECUTIVE BOARD

http://ri.qgep.com.br/static/ptb/administracao.asp?idioma=ptb





SIGNIFICANT RISKS RELATED TO CORRUPTION

We held the 2nd Annual Compliance Meeting with all employees in 2016. On that occasion, we presented a report about the activities of the first year of the QGEP Compliance Program. The CEO and the Chairman of the Ethics, Governance and Sustainability Committee attended the event. Afterwards, the entire QGEP workforce attended compulsory compliance training sessions.

The Compliance department was created in December 2015 to help the Ethics, Governance and Sustainability Committee assessing any risks related to incidents of corruption and conflicts of interest issues within the Company, and help disseminate the practices established by the Compliance Program, as well as the guidelines set forth in our Code of Ethical Conduct. The Committee’s activities are in keeping with QGEP’s policy of ensuring ethics, transparency and respect for laws. We believe all our employees and contractors

must follow the principles of the UN Global Compact and the Pacto Nacional pela Erradicação do Trabalho Escravo [Brazilian National Pact for the Eradication of Slave Labor] in all their activities, including hiring new suppliers, to reinforce this type of conduct.

Canal Confidencial [Confidential Channel] is a channel dedicated to confidential communications. Whistleblowers may or may not identify themselves when reporting conducts that violate the law, our Code of Ethical Conduct or rules. Users can also submit their questions and request the forms provided for in our Anti-Corruption Policy. Canal Confidencial is managed by an independent specialized company to make sure it will receive grievances anonymously and independently. Just as in previous years, we recorded no corruption-related legal actions in 2016.

Anti-corruption and anti-competitive behavior G4-DMA - ANTI-CORRUPTION | G4-SO3

We assess for risks related to corruption all our office activities, as well as all the activities we performed as a concession holder and those we

perform not as a concession holder, that is, carried out by third parties on our behalf, in which we participate through an Operations Committee.

ComplianceG4-57 | G4-58 | G4-HR2 | G4-SO5

Obtaining environmental permits

Procurement processes

Large number of subcontracts

Relationship with Petrobras

Problems with customs clearance

Fraud involving supplies

Problems in hiring and monitoring third

parties

No due diligence Anti-Corruption in partners/

joint ventures

Exposure to abuses in collection and tax

inspections

Checking compliance with the minimum national content requirement

Hiring consultants


Our entire workforce has adhered to our Code of Ethical Conduct. We have also been encouraging all our suppliers and service providers to adhere to the Code as well.

81 %of the members of our governance bodies received anti-corruption training.

We reassess those risk factors periodically and add the new ones to our anti-corruption risk matrix. We mitigate them by adopting practices and procedures established in our Anti-Corruption Policy. In addition, we run internal awareness-raising campaigns and hold training sessions regularly. Our Compliance Program also encourages our workforce to study issues related to corruption through surveys and campaigns organized by our internal communications team.

Communicating anti-corruption policies and proceduresG4-SO4

In 2016, 81% of the 16 members (all based in the Southeast Region) of our governance bodies were trained in, and informed about, the anti-corruption policies and procedures we adopt. In addition, our entire workforce (128 in the Southeast Region and two in

the Northeast Region) received the necessary information about, and 96% were trained in, anti-corruption regulations. We provided no training for third parties.

We are reviewing our internal anti-corruption procedures and, it is worth noting, have hired independent companies to assist us in this process. We currently have a specific form that must be completed to check sensitive corruption-related information whenever we hire third-parties.

Employee adherence G4-DMA-INVESTMENT | G4-HR1

The “Work Environment” section of our Code of Ethical Conduct states all employees must treat others and be treated in a respectful and fair manner. Diversity must also be respected so that no acts of discrimination are tolerated. Every employee receives a copy of our Code of Ethical Conduct,

the current version of which came out in 2015, when we asked each employee to submit an Instrument of Acceptance of the Code principles and rules. This instrument was renewed in late 2016 to reinforce this commitment.

We place a heavy emphasis on the quality of our activities, mainly those developed jointly with or through other companies. Accordingly, we seek to engage all our suppliers, contractors and subcontractors in this effort as well by having them sign statements of responsibility or similar documents. In addition, all our contracts contain anti-corruption provisions to ensure all our business activities are conducted in an ethical manner.

Human Rights

All our 34 significant agreements and contracts contain human rights provisions or have been assessed using human rights criteria.


RISK MANAGEMENT

IDENTIFYING, ASSESSING, PREVENTING, PLANNING FOR AND

RESPONDING TO RISKS – THESE ARE THE FOUNDATIONS OF OUR

RISK MANAGEMENT POLICY.

G4-2 I G4-14 I G4-45

RISK MANAGEMENT METHODOLOGIES

• Preliminary Risk Assessment (PRA)

• Hazard Identification (Hazid)

• Hazard Operability Study (Hazop)

• Quantitative Risks Assessment (QRA)

Management monitors our foreign exchange risk very strictly and continuously to ensure our investment plan, largely denominated in U.S. dollars, remains economically feasible.

related problems and the best mitigation actions for the risks identified.

In recent years, we have been focusing more closely on our exchange rate risk since most of our cash and cash generation are denominated in Brazilian Reais whereas much of our investments are denominated in U.S. Dollars. About 25% of our cash position at the close of 2016 – R$1.3 billion – was hedged against foreign exchange risk.

We assess operational risks from the design phase of any project. These assessments are crucial to identify the risks of our projects and operations, as well as critical equipment and systems, and introduce measures to reduce those risks ALARP (as low as reasonably possible). Both operational risks and commodity prices have been addressed at strategic planning meetings. Committed to conducting business in a sustainable manner, we use recognized risk management methodologies. A multidisciplinary team not provided for by the Bylaws is currently responsible for risk management.

Market Risks

We have a Market Risk Management Policy approved by the Board of Directors. It outlines principles and mitigation actions for changes in prices, exchange rates, interest rates and inflation, as well as prices of oil and oil by-products, in both free or regulated markets. Our market risks are managed by a Workgroup reporting to the Executive Board. This Workgroup, which meets every month, approves initiatives needed to address any

An integral part the oil and gas exploration and production business, risk management is currently crucial for any company aiming

for long-term survival. Our risk management policy is rigorously based on identifying,

monitoring and mitigating the risks of our operational and management activities. In fact, this was highlighted as a strength of our logistics processes, subsea operations and surface plants in the independent audit

conducted to renew our ISO 14001 and OHSAS 18001 certificates.


Environmental Risks

G4-EC2

Our environmental assessments focus on environmental hazards and allow us to gain a better understanding of the following aspects:

• Operational risk of our activities• Possible trajectories at sea of oil spills of

different sizes, and• Local natural resources that could be

affected by oil spills and the recovery time of those resources.

Emergency Response

We use the ICS (Incident Command System) methodology to respond to emergencies. It is a standardized management strategy for all types of incidents. The Incident Command System allows a coordinated response and establishes a common procedure for planning and managing response resources.

Crisis Management

The Crisis Management Team (CMT), composed of key Company professionals (Officers and some managers) is an integral part of our internal structure to integrate crisis management into business management.

We developed a Crisis Management Plan in a collaborative and multidisciplinary manner to adapt potential risks and consequences to our everyday practices and situation. There were three meetings in 2016 to monitor the PGC activities. We also developed the Crisis Communication Plan with the support of all the members of the crisis management team to establish guidelines, priorities and a communication standard for the entire workforce, especially the so-called spokespersons, in situations identified as potential crises.

Climate change risks that may affect our activities, revenues or expenses

Potential impactsRegulatory

risks

Physical risks

Financial risks

Possible restrictions on air emissions from burning gas or oil imposed by regulators

Temporary shutdowns due to adverse weather and ocean conditions (wind and wave patterns, and ocean currents)

Increased production costs due to new fees, taxes or environmental fines

Drop in revenue due to interruptions in production

Lower profit margins due to higher costs related to increased production activity (higher OPEX)

Once the environmental risk is assessed, we decide whether or not the amount involved is acceptable, by weighing the estimated frequency of the accident causing the damage and the recovery time of the natural resources affected.

We also monitor the risks related to climate change, as well as their financial repercussions and opportunities.

24

Regulation

The regulatory changes in the oil and gas industry in Brazil in 2016 signal an improvement in the Brazilian model to make the country more attractive for investments. We believe the greater the legal certainty, the more attractive the country. In addition, a consistent

A closer look at the situation

interpretation of tax and regulatory rules is crucial to make the industry more attractive. The IBP believes updated rules for Local Content may bring investments of about US$120 billion, boost business and make new auctions more competitive. The announcement of

the 2nd Production Sharing Auction Round, in which four pre-salt unitized areas will be offered, also has a positive effect. Four areas adjacent to pre-salt discoveries currently under concession contracts will be up for offer at the auction, scheduled for mid-2017.

Local ContentLocal Content is the share of Brazilian investments in oil exploration and production activities. The Brazilian government establishes a minimum percentage of Local Content for exploration block auctions and fines are imposed if it is not met.What has changed?On February 22, 2017, the Brazilian government approved a 50% decrease in the local content required for the largest oil fields to be auctioned as of this year. It also introduced a simpler rule to prevent fines and legal disputes from accumulating. As a result, the government moved forward with creating a favorable environment for the next round, thus benefiting the country and helping the local supply chain develop.

Multiple OperatorsAll the wells to be drilled within the pre-salt exclusion zone must be operated under the command of Petrobras at present. Petrobras may partner with other Brazilian or foreign companies as long as it is the operation leader and has at least 30% of the consortium.What has changed?Petrobras will have the right of first refusal on the pre-salt exclusion area; as a result, other qualified companies will be able to operate there. The new rules are expected to bring new companies to the area, as well as investments in areas potentially less attractive to Petrobras, which may be exploited by other companies and bring more wealth for Brazil.

UnitizationThis process is required when the discovered reservoir reaches beyond the exploratory block awarded. Unitization took a new shape in Brazil with the introduction of the sharing system and the possibility of adopting different systems in the same field. This requires the parties to enter into a joint production agreement adjusting costs and profits to prevent individualized or predatory production of the reserves.What is under discussion?The Unitization rules have to be fully implemented to make the pre-salt auction scheduled for 2017 feasible and bring definitions essential to make both systems compatible and develop the projects. This is an excellent opportunity to boost investments in the industry.

Repetro Repetro [Regime aduaneiro especial de exportação e importação de bens destinados à exploração e à produção de petróleo e gás natural, or Special customs procedure for exporting and importing goods for oil and natural gas exploration and production], introduced after studies conducted when the oil industry was deregulated, allows the suspension of federal customs duties on the importation of specific equipment to be used in oil and natural gas exploration and production. It is essential to note Repetro also applies to equipment produced in Brazil, which puts it on a level playing field with imported equipment and makes competition more even.What is under discussion?Repetro was originally scheduled to expire in 2019; however, the industry has been demanding this deadline to be extended to 2040. The Ministry of Mines and Energy (MME) has signaled the government intends to announce the extension of Repetro for 20 years in the first half of 2017.


The ANP published Resolutions 41/2015, which deals with the SGSS [Sistema de Gerenciamento de Segurança Operacional de Sistemas Submarinos, or Subsea System Operational Safety Management System], and 46/2016, which deals with the SGIP [Sistema de Gerenciamento de Integridade de Poços, or Well Integrity Management System], respectively in 2015 and 2016. Aware of the need to improve our practices, procedures and measures continuously to increase safety, we are integrating those systems into our SGI [Sistema de Gestão Integrado, or Integrated Management System]. The SGI already included the guidelines for the SGSO [Sistema de Gerenciamento de

Segurança Operacional, or Operational Safety Management System], set forth in ANP Resolution 43/2007. Holding regular meetings and audits, and adopting action plans to meet operational safety requirements are everyday practices at QGEP.

We audit our operational platforms, as well as other suppliers of critical equipment or services, using the SGSO criteria to assess integrity management at each unit and other issues related to operational and process safety. In drilling rigs, we conduct well safety inspections in which we check equipment and equipment control systems. To tackle the industry challenges, we intend to obtain the OHSAS 18001 and ISO

14001 certifications for our operational activities by developing new procedures for the EPS (Early Production System) and other operations. In addition, we are planning to create and introduce KPIs for operational safety and implement the Operational Safety Policy and Values, designed to raise awareness of our commitment and obligations to protect human life, the environment and our own and third parties’ economic activities. We developed those documents in compliance with the requirements contained in ANP’s regulations (SGSO, SGIP and SGSS) and based on the observations reported in our gap analysis audits. We consider operational safety a key factor in the success of our activities.

Being certified to OHSAS 18001 and ISO 14001 shows our commitment to health, safety and environmental management.

The importance of being certified

In keeping with our culture, which incorporates safety into all the stages of our activities, we undertook three important initiatives geared to our workforce. First, we introduced a monthly column with safety tips in our wall newspaper; second, we held the 6th Internal Occupational Accident Prevention Week, featuring a number of activities and talks; finally, we offered to workforce members from different areas a process safety management training program, lasting over 144 hours and covering widely accepted Process Safety Management (PSM) principles. We recorded no process safety incidents in our operations in 2016.

Health and SafetyG4-DMA - ASSET INTEGRITY AND PROCESS SAFETY | G4-OG13


TransportationG4-DMA-TRANSPORT | G4-EN30

The potential negative environmental impacts from transportation are oil and chemical spills. In turn, the actual negative environmental impacts are greenhouse gas (GHG) emissions. The Atlanta Field (Block BS-4) EPS did not go into operation in 2016; however, we monitored and inventoried GHG emissions and transported waste for storage and final disposal because the Far Sagaris support vessel was available for QGEP. There were no oil spills during the year.

To prevent potential negative impacts effectively, all the maritime units at our service have containment equipment to prevent oil or chemical discharges from reaching the sea in case of an

accident. In any case, we have the resources to contain and recover these substances if they reach the sea. We are evaluating a strategy to reduce the impacts of our GHG emissions since we will probably be expanding our operational activities. We also take into account GHG emissions from transportation of waste and materials, taxis at our service and air travel.

We eliminated our own fleet and, therefore, reduced our Scope 1 GHG emissions in 2016.

OUR WAY OF WORKING

I started my career here as an

intern and was hired after intensive

training and great dedication. I

learned every day with the technical

staff, which has extensive experience

in the Brazilian sedimentary basins.

Dedication is a term that describes

a series of attitudes I try to have so

both the Company and I will perform

our best, including: improving my technical

skills continuously, have good relationships and,

mainly, acting proactively. In addition, it is very

rewarding for me to know QGEP is recognized

for its social and environmental responsibility,

infecting us beyond the office.

Igor Arêas | Geophysicist

28QUEIROZ GALVÃO EXPLORAÇÃO E PRODUÇÃO 2016 ANNUAL SUSTAINABILITY REPORT

INNOVATIONWE INNOVATE BY SEEKING SOLUTIONS THAT SUPPORT

OUR BUSINESS

Deep-water exploration and production requires a high degree of innovation to

combine equipment and techniques to seek the best solution. We have been standing

out in this regard by using innovative procedures that make QGEP more

competitive and improve our expertise in the activity. In 2016, we managed over ten innovative environmental and operational projects, nine of which we either started developing or completed during the year. The projects with the greatest impact on

the business, mainly in terms of efficiency, are listed in the table on the right.

R&D PROJECTS IN PROGRESS RESEARCH INSTITUTION

Studies on artificial lift and flow assurance to produce ultra-viscous oils UNICAMP

Tests of Heavy Oils for Use in ESPs (Electrical Submersible Pumps) and Viscosity Reduction UNICAMP

Simultaneous Inversion Combination and Full Elastic Waveform Modeling to estimate subsurface density, leading to better reservoir characterization, pore-pressure estimation and field monitoring

UFRJ

Impact of Grain and Pore Morphology on the Petrophysics of Unconsolidated Rocks INGRAIN

Simulation of Flowline Preservation replacing Heavy Oil by Diesel UFRJ

Analysis and development of a cyclonic valve UFRJ

Projects from the ANP’s Human Resources Program Various institutions

Projeto Costa Norte [North Coast Project] UFRJ, UERJ and UFPA

High-resolution stochastic anisotropic seismic inversion designed to estimate geomechanical properties UFRJ

Transloading System for the Manati Platform USP/Technomar


In the oil and gas industry, there is a saying that goes, ‘An oil and/

or gas discovery first takes place in the mind of an explorer.’ This

shows how important it is for interpreters working on seismic

and geological data to be skilled in assessing the potential of

a sedimentary basin or even an area of a block. In QGEP’s

Exploration team – just as in all the Company’s areas –, we

have a group of geologists, geophysicists and technicians

with different levels of experience dedicated to determining

the potential of our exploration assets and choosing the

best opportunities. This defines and creates value for the

Company, and helps it grow.

QGEP’s Exploration team evaluates our assets and those

in the market to seek the best business options for the

Company. The Company’s growth helps strengthen the oil &

gas industry, as well as Brazil, in a strategic area, that is, energy.

Despite society’s mounting concerns about using oil, this input

is still crucial to improve humanity’s quality of life. In addition,

gas is considered a transition to an environmentally cleaner

energy mix.”

José Milton Cronemberger Mendes | Exploratory Projects Supervisor


OPERATION AND

PORTFOLIO

WE HAVE BUILT A PORTFOLIO OF ASSETS

IN DIFFERENT MATURITY STAGES

Our assets make up a diversified high-potential portfolio with a balance between the execution schedule and

the risks. It consists of 14 concessions in eight basins of the Brazilian coast.

Purchased at ANP auctions, the blocks are in different stages of maturity

and comprise a strategically planned portfolio considering the sustainability of the operation and cash generation in the short, medium and long term.

G4-4 | G4-6 | G4-8 | G4-13

After negotiations with Pacific Brasil and Premier Oil, we took over in 2016 a 100% stake in three exploration blocks: PAMA-M-265, PAMA-M-337 and FZA-M-90, two of which in the Pará-Maranhão Basin (PAMA) and one in the Foz do Amazonas

Basin. In addition, Pacific settled an outstanding debt of R$51.2 million related to the acquisition of seismic data for the PAMA blocks and paid in advance to QGEP the amount of US$10 million as part of the minimum obligations assumed in the blocks.

Also in 2016, we took over Premier Oil’s stake in Block FZA-M-90. As part of the agreement, we received US$9.5 million, calculated based on the value of Premier’s share in the guarantee of the minimum exploratory program.

32 %of the Northeast Region’s demand for gas is met by the Brazilian Manati Field.

CAL-M-372 • ES-M-598 ES-M-593 • PEPB-M-894

PEPB-M-896 CE-M-661 • PAMA-M-265 PAMA-M-337 • FZA-M-90 SEAL-M-351 • SEAL-M-428

BCAM-40 Manati

PRODUCTION

BS-4

SHORT-TERM

BM-S-8

MEDIUM-TERM

LONG-TERM

Stage of Maturity


Manati Field G4-OG6

The Manati Field, operated by Petrobras, is one of the largest non-associated producing natural gas fields in Brazil. It supplied about 32% of the Northeast Region’s demand in 2016 according to the ANP. The whole gas production from Manati is sold to Petrobras under a take-or-pay contract not pegged to oil prices. Denominated in reais, the gas sale price is adjusted annually for inflation.

The Manati Field produced 4.9 million m3 of gas per day in 2016 despite the lower demand for natural gas in the Brazilian Northeast Region. Even though the annual production fell, Manati’s production capacity remains at 6 million m³ of gas per day.

The Manati Field 2P reserves, certified by Gaffney, Cline & Associates on December 31, 2016 and recertified in 2017, amount to about 9.4 billion m3 of natural gas (about 68.9 million boe). In 2017, the Manati production, still affected by lower gas consumption in Brazil, is expected to amount to about 4.9 million m3 per day, a net 2.2 million m3 of which will go to QGEP. This estimate is based on technical analyses and market projections.

About 2.4 million m3 of natural gas was flared for safety (flare pilots) and 43.9 million m³ was used to operate the compression station in the Manati Field in 2016. These amounts correspond respectively to 0.13% and 2.5% of total production in 2016.

PRODUCTION

7


UNDER DEVELOPMENT EXPLORATORY PHASE

We acquired 10% of the BM-S-8 concession through a farm-in agreement in July 2011. We started drilling the well that led to the Carcará discovery late that year. In March 2012, the consortium announced the discovery of high-quality oil in pre-salt reservoirs. In July 2015, the Consortium finished drilling the Carcará Norte extension well, with a final depth of 6,338 meters, 5 km from the wild cat well. The extension well confirmed the potential of the discovery of light oil (31° API).

After drilling Carcará Norte, we allocated the probe to the Carcará Noroeste extension well. We finished drilling this well, located 5 km from the wild cat well, in September 2015. Its final depth is 6,405 meters. Just as in the previous wells, Carcará

Noroeste found no oil-water contact. The tests we conducted in 2015 in the Carcará Norte well confirmed that the oil is from the same accumulation found by the discovery well. The oil has an API gravity of 31° and no contaminants. The data obtained by the evaluation confirmed the area had high-yield reservoirs, as expected. The estimated initial production rates per well are at least equivalent to those of the best active wells in the pre-salt layer of the Santos Basin. This evaluation allowed us to determine the features of the reservoirs, fluids and production capacity, and provided for the consortium key information it needed to continue the operations in Block BM-S-8.

On July 29, 2016, we announced Statoil Brasil Óleo

e Gás Ltda. had acquired the 66% stake previously owned by Petrobras and become the Block operator. The base price was US$2.5 billion. This transaction has set a reference for the market value of our stake in the Block and should soon increase the visibility of our investment schedule, with the expected date for first oil. The Carcará accumulation comprises both Block BM-S-8 and the adjacent area to the north, which should be part of the next ANP Bidding Round, scheduled for this year.

Under the Evaluation Plan in progress, we should start drilling the Guanxuma pre-salt prospect, 30 km southwest of Carcará, in the fourth quarter of 2017 and conduct tests at the Carcará Noroeste well in early 2018.

Atlanta (BS-4)

QGEP, the consortium operator, is working so that oil production can start through the Early Production System (EPS). FPSO Petrojarl I, chartered from Teekay Offshore Partners L.P., is expected to arrive in Brazil in late 2017. The EPS is mainly designed to collect information about the Field production to configure the Definitive Production System (DPS) properly.

We obtained the Preliminary License in late 2015 and the Installation License in February 2016. We are expecting the EPS to produce 20 thousand barrels of oil per day initially, but Petrojarl I has a production capacity of 30 thousand barrels per day. Therefore, we may drill a third well to increase the daily production capacity. However, this decision depends on some strategic variables – one of which is oil prices.

Carcará (BM-S-8)10 10


Decommissioning Plans G4-OG11

1. Manati, Camarão Norte, CAL-M-372, PEPB-M-896, PEPB-M-894, FZA-M-90, PAMA-M-265, PAMA-M-337, ES-M-598, ES-M-673, CE-M- 661, SEAL-M-351, SEAL-M-428, BM-S-8 and Atlanta, Oliva

2. Coral and Block BM-J-2 (Block BM-J-2 return notification sent to the ANP; operations for permanent abandonment in progress)

1. Vandemir Ferreira Station (109,609 m²) and Compressor Station (490,752 m²). Both in the Manati Field, Block BCAM-40, which Petrobras operates.

*. There are no inactive onshore areas.

2 active1 onshore areas*

An area is considered inactive when there is a decommissioning process in accordance with the ANP regulations.

QGEP meets all the ANP’s requirements; therefore, there are no complaints about

the decommissioning activities of the above-mentioned areas.

14 Offshore

concessions1

2 Inactive2

offshore blocks

600,361 m² Area size

At the close of 2016, the Company had a decommissioning plan for 10% of its

active areas.

# of active onshore areas – gas production1

1

FOZ DO AMAZONAS BASINBLOCK FZA-M-90Situation: We are currently interpreting the exploratory potential of this block more thoroughly to determine and rank the main prospects for drilling.Consortium: (QGEP (operator) – 100%)

2

PARÁ-MARANHÃO BASINBLOCK PAMA-M-265 AND BLOCK PAMA-M-337Situation: The acquisition of 2,692 km² of seismic data has been completed. The processing and preliminary interpretation of the seismic data started in 2016.There was a delay in the environmental licensing process for the seismic, so the ANP extended the deadline for the first exploratory period. The new deadlines for these blocks are as follows: first exploratory period: from the original date of 08/30/2015 to 05/15/2019; and the second exploratory period: from the original date of 08/30/2021 to 05/15/2022. (*)

3

CEARÁ BASINBLOCK CE-M-661Situation: The 3D seismic acquisition in the block has been completed. The processing and preliminary interpretation of the seismic data has started. There was a delay in the environmental licensing process for the seismic, so the ANP extended the deadline for the first exploratory period. The new deadlines for these blocks are as follows: first exploratory period: from the original date of 08/30/2018 to 07/10/2019; and the second exploratory period: from the original date of 08/30/2020 to 07/10/2021. (*)

4

PERNAMBUCO-PARAIBA BASINBLOCK PEPB-M-894Situation: The environmental licensing process for the 3D seismic acquisition is underway.

BLOCK PEPB-M-896Situation: The environmental licensing process for the 3D seismic acquisition is underway.

5

SERGIPE-ALAGOAS BASINBLOCKS SEAL-M-351 AND SEAL-M-428Situation: Ibama issued the Instrument of Reference in August 2016 to facilitate the environmental licensing process for the acquisition of seismic data. (*) In 2017, we started the bidding process to hire a data acquisition company, to which the Term of Reference will be transferred.

7

CAMAMU-ALMADA BASINBLOCK CAL-M-372Situation: We are engaged in negotiations with the ANP to extend the deadlines for Block CAL-M-372 due to market conditions and the environmental licensing process.

8

ESPÍRITO SANTO BASINBLOCK ES-M-598Situation: We are interpreting the seismic data.

BLOCK ES-M-593Situation: The interpretation of the seismic data was conducted in 2016.

SITUATION OF THE EXPLORATION BLOCKS

(*) Updated in January 2017


FOZ DO AMAZONAS BASIN

PARÁ-MARANHÃO BASIN

CEARÁ BASIN

PERNAMBUCO-PARAIBA BASIN

SERGIPE-ALAGOAS BASIN

ESPÍRITO SANTO BASIN

SANTOS BASIN

CAMAMU-ALMADA BASIN

Block Situation Fluid Water depth Consortium

1 BLOCK FZA-M-90 exploration oil and gas 2,000 to 3,200 m 100% QGEP (operator)

2BLOCK PAMA-M-265

exploration oil and gas 1,800 to 3,000 m 100% QGEP (operator)

BLOCK PAMA-M-337

3 BLOCK CE-M-661 exploration oil and gas 2,000 to 3,200 m

25% QGEP 45% Total (operator)30% OGX

4BLOCK PEPB-M-894

exploration oil and gas 1,000 to 2,000 m

30% QGEP (operator) 70% Petra EnergiaBLOCK PEPB-M-896

5BLOCK SEAL-M-351

exploration oil 2,000 to 3,200 m 100% QGEP

BLOCK SEAL-M-428

7

BLOCK CAL-M-372 exploration oil 1,000 to 2,000 m

20% QGEP 60% Petrobras (operator) 20% OP Energia

BLOCK BCAM-40 production gas 35 to 50 m

45% QGEP35% Petrobras (operator)10% Geopark Brasil10% Brasoil Manati

8BLOCK ES-M-598

exploration oil and gas 2,000 to 2,500m

20% QGEP 40% Statoil Brasil (operator) 40% PetrobrasBLOCK ES-M-593

10

BLOCK BM-S-8 exploration oil 2,025m

10% QGEP 66% Statoil 14% Petrogal 10% Barra Energia

BLOCK BS-4 development oil and gas 1,550m30% QGEP (operator)40% OGX30% Barra Energia

1

2

3

4

5

7

8

10

ASSET LOCATION

QUEIROZ GALVÃO EXPLORAÇÃO E PRODUÇÃO 2016 ANNUAL SUSTAINABILITY REPORT

Remaining ReservesG4-DMA - RESERVES | G4-OG1

HYDROCARBON RESERVES (12/31/2016) – MANATI FIELD

FIELD RESERVES (100%)

NET RESERVES FOR THE COMPANY

LIQUIDS (MMBbL) GAS (Bm³) LIQUIDS

(MMBbL) GAS (Bm³)

1P 0.74 7.93 0.33 3.57

2P 0.92 9.37 0.42 4.21

3P 1.14 10.66 0.51 4.8

HYDROCARBON RESERVES (12/31/2014) – ATLANTA FIELD

FIELD RESERVES (100%)

NET RESERVES FOR THE COMPANY

CRUDE OIL (MMBbL)

NATURAL GAS (MMm³)

CRUDE OIL (MMBbL)

NATURAL GAS (MMm³)

1P 147 56 44 17

2P 191 90 57 27

3P 169 311 81 93

- Proven reserves (1P) were estimated based on the balance of materials, which indicates an original gas volume in place of 32.8 Bm³. Probable and possible reserves (2P and 3P) were estimated based on volumetric calculations, which indicates an original gas volume in place of 42.9 Bm³.

- The volume difference was interpreted as gas in place not being drained through the six existing production wells. This extra volume is located in the northeastern part of the reservoir, separated by partial permeability barriers, which should only begin to help and provide pressure support close to the end of the field life. This late pressure contribution is supported by a good adjustment in the pressure data obtained by the field flow simulations.

- GCA (Gaffney, Cline & Associates) used the estimates of the Field’s abandonment pressure, obtained from flow simulations, to estimate the Field’s recovery factors. The estimates showed a recovery factor for the case: 1P of 83.7% of the proven volume of gas in place (about 64% of the volume estimated based on the volumetric method), 3P of 72.2% of the volume based on the volumetric method and the 2P volume was estimated as an average of 1P and 3P cases.

GCA conducted an independent assessment of the hydrocarbon volumes – “original volumes of high block hydrocarbons” - in place in the upper block of the structure (areas C2, E2 and above E1), using QGEP’s permeable thickness map and GCA’s independent petrophysical interpretation. The hanging wall side, areas C1 and W, was not included due to its low net pay and the lack of any proposed development.

RESERVES FOR THE OLIVA FIELD – RESERVOIR MARAMBAIA (02/08/2012)

FLUID PROBABLE RESERVE (BBL)

TOTAL RESERVE (BBL) FR (%)

Oil 61,540,212.67 61,540,212.67 17.7

Gas 3,307,839,838.64 3,307,839,838.64 17.7

The estimate for the final recovery was based on a reservoir simulation, which indicated a recovery factor estimate of 17.7%.

We seek to build ties with suppliers committed to the way we work, based on transparency and compliance with our internal guidelines, policies and procedures, as well as regulatory rules. We check each supplier’s financial and HSE information by using the established criteria before deciding whether it may or may not provide services or products for us.

Relationship with SuppliersG4-12

In 2016, we had 765 active suppliers with 175 contracts in force totaling about R$500 million for the next three years.

OUR RESULTS

It is crucial for employees and

contractors to be aligned with

QGEP’s strategy since we are

the ones who implement and

experience, day after day, the

strategic plans defined by the

Board of Directors. In 2016, both

the industry and the economy were

faced with great turbulence, so we were

very careful about negotiating with suppliers,

hiring and managing investments; as a result,

we optimized both expenses and investments,

which fell by 9% and 46% respectively in

relation to the budget throughout the year.

Juan Soler | Financial Planning Manager


SOCIAL PERFORMANCE

WE GREATLY VALUE A TRANSPARENT DIALOGUE WITH OUR DIFFERENT STAKEHOLDERS

Owing to the type of activities we perform, we engage in an ongoing dialogue with local

communities, especially those living in coastal areas and in the areas of influence covered by

our environmental assessments. This close proximity gives us a better understanding of the impact of our activities on those citizens’

lives. In 2016, the Company continued managing our established communication channels and recorded no complaints. We

had to interrupt the contact we had initiated with the local communities in the area of

influence of the Atlanta Field (BS-4) because the arrival of Petrojarl I FPSO was put off.

G4-DMA - LOCAL COMMUNITIES | G4-SO1 | G4-SO2 | G4-OG10

Exploratory activities are licensed by Ibama’s CGPEG [Coordenação Geral de Petróleo e Gás, or General Coordination of Petroleum and Gas] after a specific environmental assessment is conducted. These assessments consider the social and economic impacts on traditional local communities, such as a possible dispute over sea areas and artisanal fishing. At the close of 2016, there were no disputes between QGEP and the communities in the vicinity of its present or future locations of operation. The impacts of our activities on local communities are described in our environmental impact assessments. In 2016, none of our operations had any impacts on local communities. In parallel, we undertake some initiatives to boost social development.

Trocando cartas – Volunteering

The Trocando Cartas (Carta&Carreira e Carta&Livro) [Exchanging Letters (Letter&Career and Letter&Book)] project encourages employee volunteers to become pen pals with

children and teenagers. Employees from different Company areas – 25 volunteers for each project – share their experiences. Through the letters, the volunteers provide mentorship by describing corporate life to teens and encourage children to improve their reading and writing skills by donating books to them. In addition, the participants also helped HR select one of the 25 young people for an opening in our Young Apprentice program.

Coat Drive – Volunteering

The 2016 edition of Gincana do Agasalho [Coat Scavenger Hunt] collected 3.2 thousand items among clothes, blankets and shoes, as well as food and dietary supplements. We sent the donations to the five charities suggested by the employees: Casa de Apoio à Criança com Câncer de Santa Teresa, Casa Maria de Magdala, Lar Maria de Lourdes, Fundação Beneficente Evangélica Jesus de Nazaré and Casa Espírita Cristã Maria de Nazaré.

COMMUNITIESOur environmental assessments take into account the social and economic impacts on communities.

TROCANDO CARTAS [EXCHANGING LETTERS]We encourage children and young people to become pen pals with QGEP employees.

We collected 3.2 thousand articles of clothing and food for five charities with our Coat Drive.


Viva Vôlei – Sports Promotion

The volleyball initiation program, designed to educate and socialize boys and girls between ages 7 and 14 through sports, started being developed independently. We supported the Viva Volêi program for six straight years, but discontinued this initiative in 2016 so the program could continue independently. The support covered the area of influence of BM-J-2, which was returned to the ANP in December 2015. About 1,800 young people were benefited while we sponsored Viva Vôlei.

Pacts and ParticipationsG4-15 | G4-16

We have participated in the UN Global Compact since 2011, and our leaders are committed to its 10 principles in keeping with our culture, values and beliefs. We adhered to the Brazilian GHG Protocol Program in 2016 and have been disclosing data about our GHG emissions in a transparent manner ever since. We have had a multidisciplinary Sustainability Workgroup for three years. It monitors trends in the oil and gas industry, in line with our sustainable development goals, and develops initiatives in all our areas and processes. Believing in collaborative work, we encourage our employees to participate in our operational committees and become involved

Communities G4-DMA-INDIGENOUS RIGHTS |

G4-OG9 | G4-HR8

Even though we have no operations in indigenous areas, we engage in discussions and interact with our stakeholders, mainly fishing communities in the areas of influence of our activities. The purpose is to establish a relationship based on transparency and respect. In 2016, we monitored our main stakeholders in Blocks FZA-M-90, PAMA-M-265 and PAMA-M-337. In turn, we have conducted no social and economic assessment in Blocks PEPB and SEAL yet. There was no activity in any of those blocks in 2016.

Our belief in the value of collaborative work is reflected in the activities we develop jointly with industry peers.

The Viva Vôlei program continues and is now maintained by the community itself.

in social and environmental responsibility issues in organizations such as the IBP, ONIP [Organização Nacional da Indústria do Petróleo, or Brazilian National Organization of the Petroleum Industry] and FIRJAN [Federação das Indústrias do Rio de Janeiro, or Rio de Janeiro Federation of Industries].


ENVIRONMENTAL PERFORMANCE

WE MANAGE OUR ACTIVITIES SO AS TO MINIMIZE OUR IMPACTS

Respecting the environment and developing initiatives and studies that promote long-term protection and sustainability is one of QGEP’s

foundations. We continued our licensing processes even though we had no operational activities in

2016. We started a survey of meteo-oceanographic data and continued monitoring stakeholders in the equatorial margin. In addition, we used the AHTS

Far Sagaris vessel, which has been available to the Company since May 2016 and will go to the Atlanta

Field EPS, to carry out an inspection to evaluate the seabed at the site. Consequently, we offered the AHTS Far Sagaris workers an environmental

education training program even though the installation phase of the EPS had not begun, conducted an HSE inspection and have been monitoring the HSE indicators for the vessel.

Our Integrated Management System (IMS), based on the ISO 14001 and OHSAS 18001 standards (Environmental Management System and Health and Safety Management System respectively) oversees Environmental Management at the Company and adopts the best practices in the industry to prevent and assess the risks of our activities to, as well as their impacts on, the environment and the communities in our areas of influence. As a challenge for the coming years, we intend to upgrade the IMS to the new ISO 14001/2015 version.

We carry out our plans and projects to protect wildlife by conducting environmental assessments and assessing the impacts of our activities on local biodiversity. Our action plans are based on projects such as the PPAF [Plano de Proteção a Fauna, or Wildlife Protection Plan] and the PMAVE [Plano de Monitoramento de Impactos de Plataformas e Embarcações sobre a Avifauna, or Plan for Monitoring the Impacts of Platforms and Vessels on Birds].

In 2016, we also reviewed the IMS policy, disseminated in all administrative units, since we did not act as an operator. To monitor compliance with the Policy, we conduct internal and external audits, monitor indicators and have critical review meetings with the Executive Board.

In November 2016, ABS carried out the ISO 14001 maintenance audit, which showed our environmental management team continues working to meet and exceed the requirements imposed by the relevant bodies, and ensure we perform our business activities in a sustainable manner. In 2016, we recorded no incidents of environmental non-compliance.

We continued our environmental licensing process throughout the year. We drafted emergency response plans and bridge documents with critical suppliers, undertook initiatives with suppliers, improved the Sustainability Workgroup and held specific environmental training.

R$ 21 million was invested in environmental preservation in 2016.

We have completed the coastal island mapping and the Wildlife Protection projects, which make up the Environmental Mapping for Emergency Response at Sea (Marem) project.

Environmental managementDMA – OVERALL | G4-DMA – ECOSYSTEM SERVICES | G4-OG4 | G4-EN31


We also held training sessions and emergency response simulations during 2016. We hold IMS meetings every quarter to discuss the key issues of each Company area and the ongoing IMS initiatives. We invested about R$2.1 million in environmental protection – most of which in prevention initiatives – in 2016, vs. R$0.3 million in 2015. This change is explained by the start-up of the Costa Norte R&D project. We also invested in education and training due to the Far Sagaris vessel operation.

INITIATIVES COMMENTS/RELATED ASSUMPTIONS*

Use of materials (e.g., use of non-renewable materials, with high energy consumption and toxic materials);

Pollution Control Project, through the waste sorting program

A QGEP initiative in compliance with the requirement for the environmental permit for the Atlanta EPS

Use of water (e.g., volume used for production or use)

Educational Campaigns, Worker Environmental Education Project


Emissions (e.g., GHG emissions, toxic emissions and emissions of ozone-depleting substances)

Monitoring gas emissions and compiling an annual GHG inventory. QGEP is a signatory to the GHG Protocol.

A QGEP initiative

Effluents (e.g., quality of the water used in production or consumed)

Pollution Control Project and Monitoring Program


Noise pollution Not available Not available

Waste (e.g., non-recoverable, materials/ toxic compounds)

Pollution Control Project, through the waste sorting program


*Data showing how much was mitigated in each initiative is not available.

ENVIRONMENTAL PROTECTION EXPENDITURES AND INVESTMENTS

(R$)

Waste treatment and disposal 31,893.23

Environmental prevention and management costs

2,035,694.40

Total 2,067,587.63

Environmental ImpactG4-DMA – PRODUCTS AND SERVICES | G4 – EN27

The initiatives we undertook throughout the year to mitigate the most significant environmental impacts caused by our products and services were:

We adopt different mitigation actions as part of our operational activities, such as the Pollution Control Project (waste, effluents and emissions), Environmental Monitoring Project (water and sediments), Individual Emergency Plan (spills of hydrocarbons

and chemicals), Worker Environmental Education Project (awareness), Fluid and Gravel Monitoring Project (drilling fluid and gravel), Wildlife and Fishing Boat Monitoring and Meteorological Parameter Monitoring.

We apply our supplier selection criteria, which take into account the requirements of our Environmental Management System, throughout the bidding process to determine whether or not suppliers may or may not provide services for us. In addition, we conduct inspections as needed before finally hiring a given supplier.

Suppliers

47crew members of the AHTS Far Sagaris vessel were trained in our PEAT [Projeto de Educação Ambiental dos Trabalhadores, or Worker Environmental Education Project].

TRAINING


Water, Effluents and Waste

WaterG4-EN22 I G4-OG5

WATER DISCHARGED IN 2016 - BS-4*

TYPE OF WATER DISCHARGES

AMOUNT (M3)

WATER DISCHARGES BY DESTINATION

WATER QUALITY AND TREATMENT METHOD USED

WAS WATER REUSED BY ANOTHER ORGANIZATION?

Oily Water

19.1 Sea Oil and Grease < 15 ppm** No

24.2Effluent Treatment Station

Oil and Grease < 15 ppm*** Yes

Sanitary Effluents 159.0 Sea

In accordance with CONAMA [Conselho Nacional do Meio-Ambiente, or Brazilian National Council for the Environment] 357 **

No

*All discharges were planned.** Treated on board the AHTS Far Sagaris vessel*** Material landed from the AHTS Far Sagaris vessel for treatment on landStandards and methodology adopted: NBR ISO 14064 Standard; ABNT [Associação Brasileira de Normas Técnicas, or Brazilian Technical Standards Association], 2007 (ABNT, 2007); Specifications of the Brazilian GHG Protocol Program; Inspection Specifications of the Brazilian GHG Protocol Program; GHG Corporate Protocol - Brazilian GHG Protocol Program (PBGHGP) - Fundação Getúlio Vargas; World Resources Institute (FGV/GVces; WRI, 2011);

Water produced in the Manati Field totaled 4.4 thousand m3 in 2016, practically the same as in 2015, or 4.1 thousand m3. The salinity of the discharged water was 1,000 ppm.

Our HSE and Logistics Departments manage effluents and waste management, monitored by the CEO and the Development Department. We also have a dedicated professional and a specific budget to comply with the QGEP procedures, which are based on the Brazilian National Policy on Solid Waste, CGPEG/DILIC/Ibama Standard 1/11 and the International Convention for the Prevention of Pollution from Ships (MARPOL). The standards described in the HSE annexes and the bridge documents drafted jointly by the Company and its critical suppliers are also considered. We monitor this

activity through specific indicators. In 2016, our activities generated 26.4 thousand kg of hazardous waste and 8.1 thousand kg of non-hazardous waste. The volume of non-hazardous waste increased threefold in relation to 2015, when only this type of waste was generated. Hazardous waste was transported by licensed companies hired by QGEP. Some of the main waste we produce is that we send to the Effluent Treatment Station and that we have processed. We recorded no incidents involving spills or drilling waste in 2016.

HAZARDOUS WASTE (AS DEFINED BY BRAZILIAN LEGISLATION AT THE GENERATION SITE)

DISPOSAL METHOD

TOTAL WEIGHT OF WASTE (KG)

TYPE REMARKS/COMMENTS

Disinfection 200 Contaminated Metal Barrels - 195 kg Fluorescent Bulbs - 5 kg Waste from BS-4

Effluent Treatment Station 24,150 Oil Waste Waste from BS-4

On-site storage 22 Batteries Waste from the Rio de Janeiro office

Co-processing 19 Ink cartridges Waste from BS-4

Processing 2,016 Contaminated Waste Waste from BS-4

On-site storage 32 Aerosol Waste from BS-4

Total 26,438

Effluents and WasteDMA – EFFLUENTS AND WASTE | G4-EN23 | G4-EN24 | G4-EN25 | G4-EN26 | G4-OG7

QGEP consumes water from municipal water supplies basically in its offices, except for the AHTS Far Sagaris vessel,

the water from which was discharged on land to be treated at the effluent station, as shown in the table:


NON-HAZARDOUS WASTE (ALL OTHER TYPES OF SOLID OR LIQUID WASTE, EXCEPT EFFLUENTS)

DISPOSAL METHOD

TOTAL WEIGHT OF WASTE (KG) TYPE REMARKS/

COMMENTS

Landfill 3,938 Non-recyclable waste Waste from BS-4

Recycling 2,177

Wood - 32 kg Metal - 740 kgVegetable Oil - 165 kgPaper/Cardboard - 374 kgPlastic - 502 kgTetra Pak - 103 kgGlass - 261 kg

Waste from BS-4

Landfill 433 Common Waste Waste from the Rio de Janeiro office

Recycling 1,142

Plastic - 90 kg Paper/Cardboard - 1,032 kgGlass - 2.5 kgMetal - 17.5 kg

Waste from the Rio de Janeiro office

On-site storage 1,521

Vegetable Oil - 88 kg Wood - 400 kgTetra Pak - 45 kgNon-recyclable waste - 629 kgPaper - 77 kgPlastic - 92 kgMetal Scrap - 190 kg

Waste from BS-4

Total 8,128

In 2016, 26.4 thousand kg of hazardous waste was transported from QGEP to licensed contractors.

We have always monitored our energy consumption although we do not invest in renewable and alternative energy sources. Our energy-related initiatives are undertaken jointly by the HSE, Administrative and Communication and Sustainability Departments.

The Sustainability Workgroup started focusing more closely on energy issues in 2016 by launching the “Toda Mudança Conta” [Every Change Counts] campaign to encourage the workforce to reduce the use of energy

and resources at headquarters. To that end, it monitors the monthly per capita consumption indicator (kWh/employee-month), checked at the Critical Analysis Meetings (RAC) with senior management.

We also monitor our critical suppliers’ energy consumption. In these cases, we require them to send us monthly spreadsheets with energy consumption data, include these amounts in our overall emissions and monitor consumption trends.

TOTAL FUEL CONSUMPTION IN GJ*

NON-RENEWABLE FUEL SOURCE** (PURCHASED) 2016

Mobile Combustion (Support vessels) -Maritime diesel A

44,617

Mobile Combustion(Captive Fleet-Light Vehicles) -Gasoline

426

Total 45,043

EnergyDMA – ENERGY | G4-EN3 I G4-EN4 I G4-EN5 I G4-OG2 | G4-OG3 |G4-OG14

INDEPENDENT AUDIT AND TRAINING: We conduct third-party audits on some suppliers depending on the service they provide to check compliance with HSE requirements, including effluent and waste management. In 2016, the office cleaning company underwent training.

AWARENESS-RAISING: We post our waste management procedures on the intranet, in all editions of our Wall Newspaper and discuss them at the quarterly HSE meetings.

In 2016, total energy consumption within the organization, including data from the AHTS Far Sagaris vessel, totaled 46,171 GJ, 1,129 GJ of which corresponded to energy consumption and the remainder to fuel, as seen in the table.

* The sources of the conversion factors were: ABNT. NBR ISO 14064-1 FGV/GVCES; WRI. Specifications of the Brazilian GHG Protocol Program IPCC; the IPCC 2006 Guidelines for National Greenhouse Gas Inventories, UKDEFRA. Greenhouse gas conversion factors for company reporting: 2012 guidelines. Conversion factors for the GHG Protocol spreadsheets ** We consumed no renewable source fuels In 2016.


Since the Far Sagaris AHTS vessel was available, our energy consumption rose about 30 times year-over-year from 2015, when QGEP was no operator. However, it was lower than in 2014, when we had a lot of operational activity and recorded total energy consumption of 502,159 GJ*.

Energy consumption outside the Company, from purchased goods and services, business trips and waste generated in operations, totaled 1,756.4 GJ, or 3.7% of the total energy consumed. In the coming years, this percentage may increase significantly because we are expecting our diesel consumption to rise. In fact, we will be transporting by land, and disposing of, a larger amount of materials and waste.

Our energy intensity ratio stood at 361 Gj per workforce member in 2016. We considered the consumption of fuels and electricity we used (96% inside and 4% outside the organization) in this calculation.

*Energy intensity was calculated based on consumption of both fuel and electricity.

ENERGY INTENSITY* - (GJ PER WORKFORCE MEMBER)

Inside the Company 347

Outside the Company 14

Total 361

In 2016, we joined with the Brazilian GHG Protocol Program, which encourages companies to produce GHG inventories regularly and make them available in the Public Registry of Emissions (http://www.registropublicodeemissoes.com.br/.) In parallel, we acquired the e-Climas software to manage emission sources and prepare the inventory in real time, with external assurance (Instituto Totum). Those initiatives led us to receive the Gold seal, which shows we have achieved an advanced stage in emissions management. These measures, adopted at headquarters, the Salvador unit (Bahia State) and BS-4 (AHTS Far Sagaris,) are closely monitored by the Executive Board.

We set no emissions reduction target because we did not act as an operator during the year; however, we monitor the statistics about emissions of CO2 equivalent by scope when we prepare our annual inventories.

Our Scope 1 emissions fell from 2014 (36,687.1 tCO2e), when we had more intense activity as an operator, but rose from 2015 (16.1 tCO2e), when we had no activity as an operator.

EmissionsDMA – EMISSIONS | G4-EN15 I G4-EN16 I G4-EN17 I G4-EN18 I G4-EN19 I G4-EN20 I G4-EN21

GHG EMISSIONS (IN TCO2E)

2016 2015 2014

Direct GHG emissions (Scope 1) 3,365.5 29.6 36,687.1

Indirect GHG emissions (Scope 2) 25.6 37.8 41.0

Indirect GHG emissions (Scope 3) 132.6 119.0 622.8

. The gases included in the calculation are CO2 , CH4 , N2O, HFC, PFC and SF6 .

. Scope 1: Transportation of materials, products, waste, employees and passengers; Others, captive fleet vehicles (mobile combustion); Scope 2: Power generation; Scope 3: goods and services purchased, waste generated by operations, business trips

. Approach by operational control

. Methodology adopted: NBR ISO 14064 Standard; ABNT [Associação Brasileira de Normas Técnicas, or Brazilian Technical Standards Association], 2007 (ABNT, 2007); GHG Corporate Protocol - Brazilian GHG Protocol Program (PBGHGP) - Fundação Getúlio Vargas; World Resources Institute (FGV/GVces; WRI, 2011);

. The sources of the conversion factors were: ABNT - NBR ISO 14064-1; FGV/GVCES - WRI. Specifications of the Brazilian GHG Protocol Program; IPCC 2006 Guidelines for National Greenhouse Gas Inventories; UKDEFRA - Greenhouse gas conversion factors for company reporting: 2012 guidelines; Conversion factors for the GHG Protocol spreadsheets

. The base year is 2016 since QGEP’s inventory is prepared annually.

Scope 2 emissions correspond to energy consumed by both QGEP offices (Rio de Janeiro and Salvador), which accounts for 0.7% of the total inventory. Scope 2 emissions decreased by 12.3 tCO2e, or 32%, year-over-year in 2016 due to the 34% drop in the emission factor of the Brazilian grid between 2015 and 2016. In turn, Scope 3 emissions virtually flattened out between 2015 and 2016.


SIGNIFICANT AIR POLLUTANTS EMITTED IN 2016

EMISSION SOURCE / BUSINESS UNIT TYPE AMOUNT EMITTED (in tCO2e)

Scope 1: Mobile Combustion: Captive fleet (light vehicles) - Headquarters / Rio de Janeiro; Mobile Combustion: Support vessels - BS-4; Fugitive emissions (CO2 fire extinguishers)

CH4 8.059

N2O 27.425

Scope 3: Goods and services purchased (third-party fleet - trucks) - BS-4; Waste generated in operations - BS-4 and Headquarters / Rio de Janeiro; Business trips - Headquarters / Rio de Janeiro and BS-4

CH4 6.791

N2O 1.376

. Methodology adopted: NBR ISO 14064 Standard; ABNT [Associação Brasileira de Normas Técnicas, or Brazilian Technical Standards Association], 2007 (ABNT, 2007); GHG Corporate Protocol - Brazilian GHG Protocol Program (PBGHGP) - Fundação Getúlio Vargas; World Resources Institute (FGV/GVces; WRI, 2011);

. The sources of the conversion factors were: ABNT - NBR ISO 14064-1; FGV/GVCES - WRI. Specifications of the Brazilian GHG Protocol Program; IPCC 2006 Guidelines for National Greenhouse Gas Inventories; UKDEFRA

- Greenhouse gas conversion factors for company reporting: 2012 guidelines; Conversion factors for the GHG Protocol spreadsheets

QGEP did not act as an operator in 2015 and used the AHTS Far Sagaris vessel in 2016; therefore, these emissions (43.65 tCO2e) increased in relation to 2015 (1.46 tCO2e), when they were practically negligible.

Since 2012, we have completed the Carbon Disclosure Project (CDP) questionnaire in response

to investors’ requests. The CDP is an international, non-profit organization created in 2000 that believes it is essential to raise corporate awareness by measuring emissions and disclosing the numbers to manage carbon and climate change risks efficiently.

Zero ODS emissions:

QGEP, including its

offices, emitted no ozone-

depleting substances

(ODS) in 2016. QGEP

favors the use of cleaner

technologies through its

contracts with suppliers.

This includes refraining

from using ODSs. In

addition, we manage

and monitor emissions

by using Way Carbon’s

e-Climas emissions

management software.

QGEP’s intensity ratio was 0.00838 tCO2e/hour worked, including Scopes 1, 2 and 3, as well as all the hours worked by QGEP’s workforce in 2016 (employees in the Rio de Janeiro and Salvador offices and hours worked in Block BS-4). The intensity ratio increased year-over-year because QGEP performed some operational activities using AHTS Far Sagaris in 2016, which led to a rise in emissions. However, it fell in relation to 2014, when we had intense operational activity, because emissions increase considerably during high operational periods.

BIOGENIC EMISSIONS (in tCO2e)

2016

Direct GHG emissions (Scope 1) 5.6

Indirect GHG emissions (Scope 3) 1.9

SCOPE 1 - BREAKDOWN (in tCO2e)

CO2 3,330.02

CH4 8.06

N2O 27.43

HFCs -

PFCs -

SF6 -


BiodiversityDMA – BIODIVERSITY | G4-EN11 | G4-EN12 | G4-EN13 | G4-EN14

We have no biodiversity-related goals and targets; however, our commitment to the environment is made public on our website. Our environmental impact assessments, such as those we conducted for the activities in the Atlanta Field, FZA-M-90, PAMA-M-265 and PAMA-M-337, address our identification with, and commitment to, local biodiversity. All of them contain impact spreadsheets and control actions to be implemented.

In 2016, none of our operations caused environmental impacts on biodiversity. The assessments prepared for each activity operated by the Company also identify, in the diagnosis of the biotic environment, endangered species located in the area of influence of the activity.

In 2016, we completed, jointly with other industry companies, the coastal island mapping and the Wildlife Protection projects, which make up the Environmental Mapping for Emergency Response at Sea (Marem) project, an technical cooperation agreement

between Ibama and the IBP. The project includes training, as well as improving the environmental impact assessment process and environmental management in connection with oil and gas exploration and production. During ROG2016 (Rio Oil & Gas), the paper co-authored by QGEP on the Unified Project for Protecting and Cleaning the Brazilian Coast won the Plínio Cantanhede Award, which honored the authors of the best technical papers presented at all the events held by the IBP between July 2014 and June 2016. The paper is available for consultation at the Institute’s library. We developed other papers jointly with operators, as in the case of the Equatorial Margin. These partnerships, which also include our active participation in IBP’s environmental discussion groups, have been helping develop better technical conditions, improve quality and reduce costs in joint projects. The HSE Department manages biodiversity within QGEP, monitored by senior management.

The paper co-authored by QGEP on the Unified Project for Protecting and Cleaning the Brazilian Coast won the Plínio Cantanhede Award during ROG2016.

Plínio Cantanhede

Award


Foz do Amazonas. AP/PA

FZA-M-90An area with high biological

diversity. Coastline has sensitive

ecosystems and is full of

Conservation Units (CUs).

Environmental Impact

Assessment of Drilling: The three

operators of Sector AP-1A prepared

a single Environmental Assessment

of the Foz do Amazonas Basin. This

Assessment was incorporated into

that of each operator, which are

currently being examined by Ibama.

2016: Metocean, the process to

determine the meteoceanographic

features of the equatorial margin

begins and will last one year.

Meteorological buoys and

mooring systems were put in

place to collect data, such as sea

currents. A survey of stakeholders’

perception of the industry was

also developed, jointly with an

independent consulting firm.

Pará-Maranhão

PAMA-M-265 and PAMA-M-337Many Conservation Units (CUs),

or areas legally created by the

government to protect their natural

resources, including species,

habitats, ecosystems, water and

ecological processes, all along the

coastline.


Assessment of Drilling: filed with

Ibama in October 2015 and being

examined by the environmental

agency.

2016: Processing and interpretation

of the seismic data started. The

ANP extended the deadline for the

first exploratory period by 258 days

due to a delay in the environmental

licensing process for the seismic.

Pernambuco-Paraíba

PEPB-M-894 and PEPB-M-896The Pernambuco-Paraíba Basin is

in the northern part of the Brazilian

east coast and has a sea area

of about 24 thousand km2. It is

bordered to the north by Alto de

Mamanguape (Paraíba State) and

to the south by Alto de Maragogi

(Pernambuco State).


Assessment:

Not yet conducted

2016: Instrument of Reference

issued in April 2016

Sergipe. Al

SEAL-M-351 and SEAL-M-428Acquired in the 13th Round in

2015, the ultra-deep water blocks

are located between 80 km and

100 km off the coast. There are

conservation units about 100 km

from these blocks.


Assessment:

Not yet conducted.

2016: The Ibama Instrument of

Reference, issued in August

2016, will provide input for the

environmental seismic assessment.

ENVIRONMENTAL ASSESSMENTSMapping of areas of influence, environmental assessments and their respective status in regulatory and environmental bodies.*

* All the identified operational sites are leased and have exploration operations.

Bacia de Santos. SP

BS-4 - Atlanta – OlivaCoastal/sea area with ecosystems

of great ecological importance,

including beaches, restingas and

mangroves. However, it is not

considered a priority area for

biodiversity conservation, and there

are no protected area nearby.

Size: 116.1 Km2

Environmental Licensing

Process: Preliminary License

obtained in December 2015 and

Installation License in early 2016.

The Ibama Operating License and

the ANP approval of the operational

safety documentation are pending.

2016: The PEAT [Projeto de

Educação Ambiental dos

Trabalhadores, or Worker

Environmental Education

Project] and the PSC [Projeto de

Comunicação Social, or Social

Communication Project] started, but

were temporarily suspended due to

the delay in start-up phase.


Projeto Costa Norte [North Coast Project]

As a Research and Development project, we are developing as a methodology to understand coastal processes and define mangrove vulnerability in the Pará-Maranhão and Foz do Amazonas Basins jointly with four other institutions*. The project, which began in late 2016 and will end in 2019, will help provide in-depth knowledge of the trajectory of pollutants in coastal and river mouth areas in the Amazonian region, particularly in the area including the Marine Sedimentary Basins of Foz do Amazonas and Pará-Maranhão. The world’s largest mangrove areas, as well as numerous beaches, wetlands, sandy banks, inlets and river mouths, can be found there. Thus, developing tools that provide greater knowledge of coastal environments allows not only Oil and Gas companies, but also the government and society in general to prevent and mitigate risks, and monitor those environments more effectively and promptly.

PROJECTS DEVELOPED IN 2016• Studies on artificial lift

and flow assurance to produce ultra-viscous oils

• Tests of Heavy Oils for Use in ESPs and Viscosity Reduction

• Simultaneous Inversion Combination and Full Elastic Waveform Modeling to estimate surface density, leading to better reservoir characterization, pore-pressure estimation and field monitoring

• Impact of Grain and Pore Morphology on the Petrophysics of Unconsolidated Rocks (INGRAIN)

• Simulation of Flowline Preservation by replacing oil by diesel.

• Analysis and development of a cyclonic valve

• Projects from the ANP’s Human Resources Program and

• High-resolution stochastic anisotropic seismic inversion designed to estimate geomechanical properties.

Reefs in Foz do Amazonas

The existence of a reef system in the Foz do Amazonas region received wide media coverage in 2016. In this regard, we have prepared an environmental impact assessment (EIA) of Block FZA-M-90 following the instrument of reference issued by Ibama. A thorough environmental assessment of this block area, including seafloor footage, and analysis of water and sediment samples, showed no presence of reefs.

The EIA we submitted to the environmental licensing agency before these recent publications already refers to marine organisms and formations in the vicinity of the assessed area. The scientific community had been aware of those formations and organisms, found on edge of the continental shelf but not in the deep and ultra-deep waters in which Block FZA-M-90 is located, since the 1970s.

Among other items, the EIA identifies and assesses the environmental impacts, and contains a description, based on an multidisciplinary approach, of the potential consequences of each environmental aspect of the activity

*Universidade Federal do Pará [Federal University of Pará State], COPPE- UFRJ [Instituto Alberto Luiz Coimbra de Pós-Graduação e Pesquisa de Engenharia, or Alberto Luiz Coimbra Institute for Graduate Studies and Research in Engineering=Universidade Federal do Rio de Janeiro, or Federal University of Rio de Janeiro State], Universidade do Estado do Rio de Janeiro [University of Rio de Janeiro State] and Prooceano

and their estimated impacts. This evaluation, which is being examined by the environmental agency, is based on information obtained in the description of the activity and the environmental assessment of different environments – physical, biotic, social and economic. The operational impacts are restricted to specific areas in the vicinity of the well site; therefore, the drilling will not affect the biogenic formations in the Foz do Amazonas Basin.


OPERATING PERFORMANCE

THE RECESSION IN BRAZIL AFFECTED THE

ANNUAL NATURAL GAS PRODUCTION,

WHICH TOTALED A DAILY AVERAGE OF 4.9 MILLION

M3 IN 2016

Data from the ANP indicate the Manati Field accounted for about 6% and 32% of total gas production in Brazil and in the Northeast Region respectively in 2016.

AVERAGE DAILY GAS PRODUCTION (Millions of m3 per day)

6.6

5.0

6.2 6.1

1T13 2T13 3T13 4T13

Average 2013: 6.0

6.0 5.9 5.9 5.9

1T14 2T14 3T14 4T14

Average 2014: 5.9

5.7 5.75.0

5.9

1T15 2T15 3T15 4T15

Average 2015: 5.6

6.0

5.04.4 4.3

1T16 2T16 3T16 4T16

Average 2016: 4.9

4.9 MM m3

In 2016, the average daily natural gas production was


ECONOMIC AND FINANCIAL PERFORMANCE

OUR FINANCIAL DISCIPLINE, COUPLED WITH LOWER

EXPLORATORY EXPENSES IN 2016, LED TO A RISE IN NET INCOME

Net Revenue

Net revenue came to R$476.5 million in 2016, 4.0% down on R$496.2 million in 2015. This decrease was mainly due to a year-over-year fall in gas production, partially offset by the higher gas price, adjusted annually under the terms of the sales contract.

Costs

A decrease in revenue is reflected in depreciation, royalties and special participation expenses. As a result, operating costs totaled R$240.7 million in 2016, down 4.8% from R$252.9 million in 2015, which offset the impact of lower production on gross profit, which shrunk by 3.1%. Operating costs were mainly affected by maintenance costs, which shot up by 205.1% year-over-year due to painting and maintenance works on the Manati platform from 2Q16. On the other hand, depreciation and amortization

496.2 476.5503.2486.1

NET REVENUE (R$ million)

15 161413

252.9 240.7242.3209.9

OPERATING COSTS (R$ million)

15 161413

Net income amounted to R$152.9 million in 2016, up 63.3% from 2015. This shows

the Manati Field remained profitable despite the drop in production, coupled

with lower exploration expenses in 2016.

decreased by 45.8% when compared with 2015 due to an addendum to the Manati Field gas sales contract and the effect of exchange rate changes on the provision for abandonment. In addition, lower production led to a year-over-year fall of 38.9% in special participation expenses. Production costs were also affected by expenses on the gas compression station, which totaled R$37.0 million in 2016. In 2015, the gas compression station costs came to R$13.2 million since it went into operation only in August of that year.

R$ 476.5 million net revenue in 2016, 4% down on 2015 due to a YoY fall in gas production

G4-DMA – ECONOMIC PERFORMANCE


Operating Revenues (Expenses)

General and administrative expenses came to R$49.6 million in 2016, vs. R$52.9 million in 201, 6.3% down year-over-year, explained by cost reduction during the year. Inflation in the same period stood at 6.3%, which shows our commitment to managing expenses in a year in which revenues fell.

Exploratory Expenses

In 2016, exploratory expenses totaled R$62.5 million, vs. R$386.1 million in 2015, since we wrote off R$332.5 million in 2015, related to Block BM-J-2, which we returned to ANP, and conducted the seismic for the blocks acquired at the 11th ANP Bidding Round. We also recorded in 2016 exploratory expenses on the acquisition of seismic data in the equatorial margin and Espírito Santo Basin.

Financial Result

We recorded net financial income of R$46.6 million in 2016, vs. R$272.2 million in 2015, an 83% drop. This decrease resulted from interest received on the Company’s cash balance, 75% of which is invested in financial instruments denominated in Reais whereas the remainder is invested in foreign exchange derivatives to cover dollar-denominated obligations. The rise of the BRL against the USD and the lower benchmark interest rate, which stood at 13.75% at the close of the year, led to a drop in interest on short-term investments, R$51.0 million in 2016 vs. R$260.4 million in 2015.

In addition, we had to recognize the income statement interest expenses on the BNB (Banco do Nordeste do Brasil) loan since we returned to the ANP one of the assets associated with that loan – Block BM-J-2 – in late 2015. This led to a loss of R$4.5 million under “other revenues and expenses”, vs. R$11.9 million income in 2015.

EBITDA and EBITDAX

EBITDAX amounted to R$188.3 million in 2016, 31.0% down on R$273.0 million in 2015. This decrease was led by a 12.2% drop in the Manati Field production in 2016, coupled with higher exploration expenses due to the acquisition of seismic data for blocks acquired at the 11th ANP Bidding Round in 2016. In turn, EBITDA came to R$188.5 million in 2016, vs. a loss of R$74.9 million in 2015, because we returned Block BM-J-2 in late 2015, leading to write-off expenses of R$335 million.

Net Income

We posted net income of R$152.9 million in 2016, 63.3% up on R$93.6 million in 2015 despite a fall in operating revenues and interest income. This performance shows the Manati Field remained profitable despite the drop in production, coupled with lower exploration expenses in 2016.

Debt

Total debt stood at R$359.7 million on December 31, 2016, against R$369.6 million at the close of 2015 because we started repaying our debt with FINEP (Financiadora de Estudos e Projetos, or Funding Authority for Studies and Projects) in September 2016. QGEP’s debt is comprised of funds obtained from FINEP and lines of credit from BNB. The funds from FINEP come from two lines of credit – one with a fixed rate and the other with a variable rate – intended to fund the development of the Atlanta Field EPS. Both have a deferment period of three years and payment terms of seven years, with a total of R$266.0 million available for QGEP. The remaining loans come from the BNB credit line. This line of credit is intended to fund the exploration of QGEP’s assets in northeastern Brazil.


VALUE ADDED STATEMENT – VAS

OF EACH R$1.00 OF REVENUE PRODUCED BY QGEP IN 2015, R$0.84 WAS DISTRIBUTED TO SOCIETY

QGEP’s activities generated R$400.2 million in value to society in 2016, vs.

R$300.0 million in 2015. Of each R$1.00 of revenue produced by QGEP in 2015, R$0.84 was distributed among different stakeholders: the government (taxes), third parties (interest paid to banks and on rent), shareholders (dividends), our

workforce (wages, salaries and benefits) and retained by the Company as surplus

reserves.

G4-EC1

VAS (in thousands of R$) 2016 2015 2014 2013 16/15 (%)

Workforce members 55,242 58,915 60,973 57,462 -6.2%

Government 175,294 151,393 188,474 161,324 15.8%

Interest 16,788 (3,934) 4,807 25,909 ND

Shareholders 152,898 93,613 194,824 192,242 63.3%

Value Added to Distribute 400,222 299,987 449,078 436,937 33.4%

TAX INCENTIVES BOOKED AS DEDUCTIONS FROM CORPORATE INCOME TAX (in thousands of R$) 2016

Benefício do Lucro da Exploração [Exploration Profit Benefit] 1 35,875

Lei do Bem [Law of Good] 2 14,916

Crédito Presumido de ICMS [Presumed ICMS [State VAT] Credit] 2 13,483

Programa de Alimentação ao Trabalhador [Workers’ Nourishment Program] Lei de Incentivo ao Esporte [Sports Incentive Law] 1 357

TOTAL 64,632

1. 100% deducted from Corporate Income Tax payable2. Benefit excluded from Corporate Income Tax and CSLL [Contribuição Social sobre Lucro Líquido, or Social Contribution on Net Income] assessmentsNote: Based in the SUDENE [Superintendência de Desenvolvimento do Nordeste, or Superintendence for the Development of the Northeast] area, the indirect parent company Manati, merged by QGEP, is entitled to a 75% income tax break and additional benefits calculated based on the Exploration Profits for 10 years, extended for another 10 years due the upgrading and expansion of the Manati Field, to be completed on December 31, 2025. The incentive amount was booked in the income statement and subsequently transferred to the surplus reserve-tax incentives, under the indirect subsidiary Manati’s shareholders’ equity, until the date it was merged by QGEP. The formal transfer of the benefit, as a result of the merger, was approved in April 2013. Under the terms of Executive Order 64214/69, QGEP is eligible for the benefit since it merged its wholly-owned subsidiary Manati and became its successor company. An amount equal to the tax saving obtained should be booked under a surplus reserve account, in shareholders’ equity, and may not be distributed to shareholders as dividends. Under Lei do Bem, the Company may recover 80% of R&D and payroll expenses on these studies; in addition, it has the benefit of the Crédito Presumido de ICMS. Using the tax incentive from the PAT, the Company deducted from its tax expense an amount equivalent to 15% of the total expenses of the program.

Tax IncentivesG4-EC4

We used R$64.6 million in tax incentives in 2016 – vs. R$50.4 million in 2015 – in connection with Benefício do Lucro da Exploração [Exploration Profit Benefit], Lei do Bem [Law of Good], Crédito Presumido de ICMS [Presumed

ICMS [State VAT] Credit], PAT [Programa de Alimentação ao Trabalhador, or Workers’ Nourishment Program] and Lei de Incentivo ao Esporte [Sports Incentive Law].

OUR FUTURE

Our culture determines our internal

procedures and rests on all the

foundations laid by our Mission,

Vision, Values and Ethical Principles.

Through our Strategic Initiatives, we

ensure transparent management and

strengthen corporate governance to

keep pace with the best practices in the market.

This is how we ensure strategic sustainability

management and reinforce our commitment

to health, safety and the environment in our

activities. We are building our future on these

foundations, and I am proud to be a part of that.

Patrícia Porsche | Planning and Management Analyst


MANAGEMENT & STRATEGY

DILIGENCE IN BUSINESS TO ENSURE THE COMPANY’S

SUSTAINABILITY

Our business is managed based on the concepts of business sustainability and

conservative asset management, which focuses on both long-term results – without losing sight of opportunities –, and short- and medium-term earnings. In four years, the Project Management Office (PMO) has allowed us to improve internal

processes and consolidate a structure and culture focused on monitoring and managing

our strategic projects. This has made our operation more dynamic and provides supports

for management’s decisions.

These improvements, coupled with our strategy of maintaining capital discipline, establishing an order of priority for investments and having a portfolio oriented to short-, medium- and long-term results, have been helping us perform well amid the recession – even though the industry has started showing some signs of recovery.

Alongside with those three strategic pillars, the Board of Directors’ decisions have been increasingly based on this principle: one step at a time. By acting prudently, we have been able to maintain our operational activity and continue achieving positive results.

THREE STRATEGIC PILLARS:capital discipline, investment priorities and a portfolio oriented to short-, medium- and long-term results.

G4-42

The Project Management Office (PMO) ensures our internal processes work more efficiently and

consolidates the structure for monitoring and managing our strategic projects.


CAPITAL EXPENDITURES

OUR STRONG CASH POSITION CAN MEET OUR CASH NEEDS

FOR AT LEAST TWO YEARS

We have a disciplined approach to investments, coupled with strict controls over expenses. This allows us to maintain

a cash position strong enough to meet our cash needs for at least two years.

Investment decisions are made by the Consortia controlling the different

assets of our portfolio. Afterwards, we account for the portion corresponding to our stake in the respective asset.

In 2016, CAPEX amounted to US$53 million, US$26 million and US$17 million of which we invested respectively in the Atlanta Field and in the acquisition and analysis of seismic data of the blocks we acquired in the 11th ANP Bidding Round. We are planning to invest US$70 million

in 2017. This amount includes US$38 million for the Atlanta Field and US$30 million for exploration activities, of which US$8 million is earmarked for activities in Block BM-S-8 and US$14 million for the acquisition of seismic for the blocks we acquired in the 11th ANP Bidding Round.

US$ 573 million invested in the last five years

PLANNED FOR 2017

US$

70million

BM-S-8

11th round seismic

43%

54%

3%

2016

US$

53million

Atlanta Field

11th round seismic

Others

49%

32%

19%

36%

64%

125

53

115

70

193

87

CAPITAL EXPENDITURES (US$ million)

14 1615 17*1312

* Planned

Atlanta Field

Exploration Others


PROSPECTSTHE INDUSTRY’S PERFORMANCE

IS EXPECTED TO IMPROVE IN COMING YEARS, AND THE SHARE OF NATURAL GAS IN THE ENERGY

MIX IS EXPECTED TO INCREASE

The effects of the regulatory changes introduced in 2016, discussed above,

should be felt in the coming years and are expected to benefit the

industry. Despite the lingering political and economic turbulence in Brazil,

some positive changes may signal a recovery for the oil and gas business.

Based on the new auction schedule, we will be able to develop a more reliable long-term strategic plan. The adjacent area to the north of Block BM-S-8, in which the Carcará reservoir is located, is expected to go up for auction in the ANP Bidding Round. The bidding process is crucial so the consortium can make plans for the development of the Field.

Other government measures, such as easing the regulations on Local Content and opening the pre-salt to other operators, also tend to benefit QGEP in the medium and long term.

The initiatives to deregulate the industry have been undertaken by the market jointly with the government, more open to job creation and increased competition. This change may be important to QGEP since it may boost asset transactions in the medium term.

Concerning the product, associated gas from Carcará, when production starts, will add to the Manati Field production and increase our share in the supply of natural gas in Brazil.

The area in which the Carcará reservoir is located is expected to go up for auction in the next ANP Bidding Rounds.

The measures announced as part of the

GÁS PARA CRESCER [GAS FOR GROWTH]Program will establish a new role for gas in the industry and may attract the investment needed to make the distribution of the gas associated with the Carcará oil feasible.

Studies show the share of natural gas in the energy mix will probably increase in the coming years.


ABOUT THIS REPORT

6TH ANNUAL SUSTAINABILITY REPORT FOLLOWING THE GRI GUIDELINES

QGEP Participações S.A. presents its 6th Annual Sustainability Report to the general public. The information

contained here covers the year 2016 and follows the same pattern of

reporting periods used in previous years. The report has been prepared

‘In accordance’ with GRI’s G4 Guidelines’ Comprehensive option,

including the GRI oil and gas industry indicators.

G4-17 | G4-18 | G4-28 | G4-29 | G4-30 | G4-31 | G4-33 | G4-48

Throughout the document, the QGEP abbreviation is used to refer to QGEP Participações S.A. and all its direct and indirect subsidiaries. The contents of the 2016 Report is based on the main facts about the Company during the reporting period and the topics of the Materiality Matrix, developed based on documents and consultations with internal and external stakeholders, with a focus on the main issues to be addressed.

The financial information posted on QGEP’s website covers the entire Company whereas the social and environmental information refers only to the blocks QGEP operates. Exceptions are pointed out throughout the text. This information follows the International Financial Reporting Standards (IFRS) and was audited by KPMG. There is no external assurance for the GRI indicators. The Manati Field hydrocarbon reserves, certified annually, were certified by external consulting firm Gaffney, Cline & Associates (GCA) in 2016.

QGEP has been a participant in the UN Global Compact since 2011, and the initiatives related to it are described here. In turn, the Index includes detailed cross-referencing between the GRI indicators and the principles of the UN Global Compact. This publication was submitted to GRI assurance. GRI does not examine the quality of the report contents, but only checks whether the disclosure standards provided for in items G4-17 to G4-27 were set out correctly both in the GRI Index and in the texts.

The Executive Board examines and approves the contents of the Sustainability Report.

Any queries and comments on this report should be sent to [email protected].

This Report provides social and environmental information specifically about the blocks in which QGEP acts as an operator. The economic and financial information, in turn, covers the entire Company.


Materiality MatrixG4-19 | G4-20 | G4-21 | G4-22 | G4-23 |

G4-24 | G4-25 | G4-26 | G4-27

This Report has been prepared

based on a new Materiality Matrix developed for QGEP by an expert consulting firm following the GRI-G4 guidelines. The Matrix sets out economic, environmental and social impacts and their influence on stakeholders’ evaluations and decisions.

This materiality matrix was developed in 2015 and revised in 2016 considering the Company’s activity during the year and market aspects. The following sources of information were used initially in 2015 to determine the material topics to be addressed in the Report: QGEP’s 2014 Materiality, topics relevant for peers and the GRI-G4 Guidelines (including the Oil and Gas Sector Disclosures). During this stage, we selected 24 potentially material topics, all related to the Company’s sustainability context. Afterwards, they were assessed, set in order of priority and divided into two axes:

Influence axis: online and face-

to-face consultations with internal

stakeholders (workforce members)

and external stakeholders (suppliers,

service providers, partners,

Directors, representatives of

government bodies and regulators)

to establish an order of priority for

the topics based on their influence

on those stakeholders’ decisions;

and a survey about the facts

receiving the most media coverage

to establish an order of priority for

the topics based on their potential

to affect QGEP’s image and/or

reputation.

Impact axis: we assessed the

impact of each topic on QGEP or its

value chain to establish an order

of priority for topics based on their

potential impact on the business;

and analyzed QGEP’s corporate

strategy and policies and established

an order of priority for the topics

based on the impact of those

guidelines on each topic.

RELATÓRIO DE SUSTENTABILIDADE 2016

58QUEIROZ GALVÃO EXPLORAÇÃO E PRODUÇÃO RELATÓRIO DE SUSTENTABILIDADE 2016

Influ

ence

on

stak

ehol

der a

sses

smen

ts a

nd d

ecis

ions

Significance of economic, environmental and social impacts

The stakeholders participating in the process were selected in relation to the Company or the market in which it operates. Next, all the information was cross-checked and the data were consolidated, leading to 24 material topics, relevant inside and outside the Company, in the following categories: eight priority topics, five material topics, five significant topics and three relevant topics as seen below.

The Investor Relations and Sustainability Departments decided to address the eight priority topics in the 2015 Report:

• Economic and financial performance

• Accident and oil spill prevention, and emergency preparedness

• Anti-corruption• Emissions and climate change• Asset integrity and process safety• Oil and gas in deep waters• Reserves and• Biodiversity.

QGEP’s senior management decided to include in evaluation and validation of the Materiality Matrix three topics that – although not considered priorities – are related to oil and gas industry indicators. Those topics are:

• Impacts on communities• Waste and effluents, and• Energy efficiency.

During the review in 2016, we perceived the need to include the topic Growth strategy in our Materiality Matrix. This topic was not among the 24 included in our Materiality Matrix. However, we examined our competitors and the market, and realized it was relevant to us due to our current operational phase, in which management focuses constantly on structuring the Company. As a result, this is a material topic for us.

01 Economic and financial Performance

02 Market presence03 Reserves04 Public policies05 Compliance06 Anti-corruption07 Anti-competitive behavior08 Indirect economic impacts09 Impacts on communities10 Child and compulsory labor

11 Indigenous rights and local communities

12 Stakeholder grievance mechanisms

13 Accident and oil spill prevention, and emergency preparedness

14 Asset integrity and process safety

15 Oil and gas in deep waters16 Emissions and climate change

17 Waste and effluents18 Energy efficiency19 Water20 Biodiversity21 Use of natural resources

and materials22 Employees and

service providers23 Occupational health and safety24 Suppliers and labor practices

Priority

Important

Significant

Considerable

2

10

8

19

12

21

1122

20

7

94

24

5

1823

13

116

14

153

617

Non-Material TopicsMaterial Topics


GRI-G4 CONTENT INDEXGRI G4 CONTENT INDEX ‘IN ACCORDANCE’ COMPREHENSIVE

OPTION – GRI G4-32

STANDARD GENERAL CONTENT

Page / Answer OmissionsGlobal

compact principles

STRATEGY AND ANALYSIS

G4-1 5 -

G4-2 22 -

ORGANIZATIONAL PROFILE

G4-3 11 -

G4-4 11 e 30 -

G4-5 63 -

G4-6 11 e 30 -

G4-7 11 -

G4-8 30 -

G4-9 4 -

G4-10 13 - 6

G4-11 13 - 3

G4-12 35 -

G4-13 30 -

G4-14 22 -

G4-15 38 -

G4-16 38 -



compact principles

GOVERNANCE

G4-38 18 -

G4-39 18 -

G4-40 18 -

G4-41This information is disclosed annually by May 31, in item 12.12 of the Reference Form, available on the Company’s

website and on the CVM’s website.-

G4-42 53 -

G4-43 18 -

G4-44 18 -

G4-45 18 e 22 -

G4-46 18 -

G4-47 18 -

G4-48 56 -

G4-49 18 -

G4-50 QGEP does not report critical concerns communicated to the Board. -

G4-51This information is disclosed annually by May 31, in item 13 of the Reference Form, available on the Company’s website

and on the CVM’s website. -

G4-52This information is disclosed annually by May 31, in item 13.1 of the Reference Form, available on the Company’s

website and on the CVM’s website.

G4-53 13 -

G4-54 This ratio is 5.69. -

G4-55 This ratio is 0.14. -

ETHICS AND INTEGRITY

G4-56 9 - 10

G4-57 20 - 10

G4-58 20 - 10


compact principles

IDENTIFIED MATERIAL ASPECTS AND BOUNDARIES

G4-17 17 e 56 -

G4-18 56 -

G4-19 57 -

G4-20 57 -

G4-21 57 -

G4-22 57 -

G4-23 57 -

STAKEHOLDER ENGAGEMENT

G4-24 57 -

G4-25 57 -

G4-26 57 -

G4-27 57 -

REPORT PROFILE

G4-28 56 -

G4-29 56 -

G4-30 56 -

G4-31 56 -

G4-32 59 -

G4-33 56 -

GOVERNANCE

G4-34 17 -

G4-35 17 -

G4-3617 / This information is disclosed annually by May 31,

in item 12.12 of the Reference Form, available on the Company’s website and on the CVM’s website.

-

G4-37 18 -

http://ri.qgep.com.br/ptb/s-4-ptb.html?idioma=ptb





SPECIFIC STANDARD DISCLOSURES

Material aspects

Form of management

and indicatorsPage / Answer Omissions

Global compact

principles

CATEGORY: ECONOMIC

Economic performance

G4-DMA 49 -

G4-EC1 51 -

G4-EC2 23 - 7

G4-EC3 14 -

G4-EC4 51 -

CATEGORY: ENVIRONMENT

Energy

G4-DMA 42 -

G4-EN3 42 - 7 | 8

G4-EN4 42 - 8

G4-EN5 42 - 8

G4-OG2 42 -

G4-OG3 42 -

G4-EN6 Electricity consumption did not fall in 2016. - 8 | 9

G4-EN7 Energy from products sold did not fall in 2016. - 8 | 9

Biodiversity

G4-DMA 45 -

G4-EN11 45 - 8

G4-EN12 45 - 8

G4-EN13 45 / There are no protected or recovered habitat areas. - 8

G4-EN14 45 - 8

Material aspects

Form of management


Global compact

principles

Emissions

G4-DMA 43 -

G4-EN15 43 - 7 | 8

G4-EN16 43 - 8

G4-EN17 43 - 8

G4-EN18 43 - 8

G4-EN19 43 - 8 | 9

G4-EN20 43 - 7 |8

G4-EN21 43 - 7 |8

Effluents and waste

G4-DMA 41 -

G4-EN22 41 - 8

G4-EN23 41 - 8

G4-EN24 41 - 8

G4-OG5 41 -

G4-OG6 31 -

G4-OG7 41 -

G4-EN25 41 - 8

G4-EN2641 / No bodies of water are

affected significantly by our water discharges.

- 8

Products and services

G4-DMA 40 -

G4-EN27 40 - 7 | 8 | 9

G4-OG8 QGEP has no refineries, nor does it sell fuel. -

G4-EN28 There are no data due to the nature of QGEP’s business. - 8

TransportG4-DMA 26 -

G4-EN30 26 - 8

OverallG4-DMA 39 -

G4-EN31 39 - 7 | 8 | 9


Material aspects

Form of management


Global compact

principles

CATEGORY: SOCIAL

SUB-CATEGORY: Human rights

Investment

G4-DMA 21 -

G4-HR1 21 - 2

G4-HR2 20 - 1

Indigenous rights

G4-DMA 38 -

G4-HR8 38 - 1

G4-OG9 38 -

SUB-CATEGORY: Society

Local communities

G4-DMA 37 -

G4-SO1 37 - 1

G4-SO2 37 - 1

G4-OG10 37 -

G4-OG11 33 -

Anti-corruption

G4-DMA 20 -

G4-SO3 20 - 10

G4-SO4 21 - 10

G4-SO5 20 - 10

OIL & GAS SECTOR SUPPLEMENT

CATEGORY: Economic

ReservesG4-DMA 35 -

G4-OG1 35 -

Material aspects

Form of management


Global compact

principles

CATEGORY: ENVIRONMENT

Ecosystem services including biodiversity

G4-DMA 39 -

G4-OG4 39 -

CATEGORY: SOCIETY

SUB-CATEGORY: Society

Involuntary resettlement

G4-DMA There were no resettlements in 2016. QGEP is expecting no resettlements due to its

operating activities.

-

G4-OG12 -

Asset integrity and process safety

G4-DMA 25 -

G4-OG13 25 -

SUB-CATEGORY: Product Responsibility

Fossil fuel substitutes G4-OG14 42 -

QUEIROZ GALVÃO EXPLORAÇÃO E PRODUÇÃO

Corporate Information G4-5

Rio de Janeiro: Av. Almirante Barroso, 52 – Sala 1301 Centro – Rio de Janeiro/RJ – Brazil

Bahia: Av. Antônio Carlos Magalhães, 1034 – Sala 353 Pituba Parque Center – Itaigara Salvador – Bahia – Brazil

Any queries and comments on this report should be sent to [email protected]

CreditsOverall Coordination: QGEPGRI and content consulting, text and graphic design: globalRI - www.globalri.com.brPictures: Daniel Geller / Kiko Cabral / QGEP Collection

2016 annual sustainability report -...

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