Refining
We operate two refineries, Sines and Oporto, and have an extensive product range that includes gasoline, diesel fuel, jet fuel, fuel oil, LPG, bitumen and several aromatic products.  Our refining business is responsible for the supply of oil products to our retail, wholesale and LPG marketing divisions, competitors and foreign customers, as well as for the operation of our refining and logistics assets.
We store and transport our products using either our wholly-owned storage assets or affiliated logistics companies.  We have a leading position in the Portuguese market, as we own the four largest Portuguese tank farms and 80% of national crude oil products storage in 2005.

Safety, reliability and the environmental performance of our refinery operations are critical to our financial performance.  Unplanned downtime of the refineries generally results in the loss of gross margin, increased maintenance costs and a temporary increase in working capital investment and related inventory position.  The financial impact of planned downtime, such as turnaround and major maintenance projects, is mitigated through a diligent planning process that considers product availability, margin environment and availability of resources to perform needed maintenance.  In 2003 and 2004, we completed two major turnarounds of our refineries (which typically occur every four years) and completed two significant maintenance and repair projects.

We have planned several projects to improve energy efficiency of our refineries, including the future construction of a cogeneration facility at the Sines refinery, as described in “—Power—New Power Projects”.  We also undertake compliance projects, which consist of capital expenditures required to comply with strict environmental regulations.

    Facilities
Our two refineries in Portugal together represent 100% and 20% of Portuguese and Iberian refining capacity, respectively, and collectively account for 88% of Portugal’s annual domestic petroleum product requirements.  We have invested approximately €240 million in the last five years to upgrade and improve the efficiency of our refineries (€158 million for Sines and €82 million for Oporto).  Our Sines refinery is a cracking refinery and our Oporto refinery is a hydroskimming refinery.

Our refineries are considered business units and are operated as profit centres.  In order to compare the performance of our refineries with international benchmarks, it is necessary to eliminate the effects of inventories or supply and trading activities.
Realised refining gross margin results from the difference between the value of finished and intermediate products produced in each period and the value of raw materials and other components processed in the same period.  Raw materials and other components (such as crude oil, naphtha, MTBE, reformate and chemicals) are valued at average monthly replacement prices, whereas finished and intermediate products are valued at average monthly import-export parity prices.

    Sines refinery
We operate a cracking refinery in Sines, which began operations in 1979.  With its current distillation capacity of approximately 10.5 million tonnes/year (220,000 bbl/day), it is Portugal’s principal refinery, accounting for approximately 70% of total Portuguese national refining capacity.  It is also one of the largest refineries in Iberia.  Sines’ coastal location and harbour facilities are convenient for both crude procurement and product exports.

    Sines – new conversion project
We intend to add a new conversion project to our Sines refinery, which aims to convert heavier fractions of crude oil (such as vacuum residue) into light and medium distillates (such as high quality diesel).  The market trends driving this project, which emphasise the importance of increasing diesel production and reducing fuel production, are the current high crack spreads between diesel and fuel oil, leading to higher refining margins, and the increased demand for diesel in the European market, especially in Iberia.

    Oporto refinery
The Oporto complex, located on the Northwest coast of Portugal, began operations in 1969 and currently has an annual distillation capacity of approximately 4.4 million tonnes per year (90,000 barrels per day).  Our Oporto refinery includes a hydroskimming refinery, a petrochemicals aromatics plant, a base oil plant and a lube oil plant, all within the Oporto complex.

    Supply and Trading of Crude Oil and Refined Products
Both Portugal and Spain are net importers of crude oil and refined products.  Like other European countries, Portugal and Spain are net exporters of gasoline and net importers of medium distillates, especially diesel.  Iberia’s location allows imports from Western and Eastern Europe, the Middle East, North and West Africa and South America and exports to most major product markets in the Mediterranean and the Atlantic Basin (European countries and the United States.

We are responsible for all the crude oil and the majority of refined product imports to Portugal due to our ownership of the country’s only two refineries.

Our extensive logistics system enables us to deliver products in a cost-effective manner and provides us with supply and distribution flexibility.  We believe that this logistics platform represents a delivery cost advantage in Portugal over our importing competitors, incentivising our customers to rely on us for their supply needs.

Marketing
    Retail
We are the market leader in Portugal in retail sales of petroleum products.  We sell Galp Energia branded fuel to retail customers through our network of 1,060 fuel service stations in Iberia (837 in Portugal and 223 in Spain).  Our service stations in Portugal accounted for 37% of retail market share by volume (with a total throughput of 2,527 thousand m³ of petroleum products).  In Spain, in 2005, we had a retail market share of 2% (with a total volume of 714 thousand m3).

Additionally, through our affiliated companies, we participate in the distribution and commercialisation of liquid fuels in the African market, especially in Angola, Cape Verde, Mozambique and Guinea Bissau, where we have 56 service stations.

    Wholesale
Our wholesale marketing business is engaged in the sale of Galp Energia branded oil products, including gasoil, mogas, fuel oil, jet fuel, lubricants and bitumen, directly to over 4,300 industrial and commercial users in Portugal and Spain.  The table below sets out the breakdown of our wholesale marketing business unit by number of customers as of and for the year ended 31 December 2005:

    LPG
In 2005, we had a leading 44% LPG market share in Portugal and a growing presence in Spain with 1.6% market share.  Our LPG marketing business has over one million customers in the residential, industrial services and automotive fuel segments. In 2005, we launched a new, light-weight “Pluma” cylinder, manufactured in Portugal, which is much easier to lift and transport than its steel predecessors.  Currently only we and BP offer this type of cylinder in Portugal and the market has responded positively to this new product.  Our Pluma cylinder is internationally recognised and has received several awards.

Selected Financial and Operating Data
The following table sets out selected financial and operating data relating to our Refining and Marketing business segment for the periods indicated below:



——————
(1) The gross margin amounts for the years ended 31 December 2004 and 2003 prepared in accordance with Portuguese GAAP differ from the financial statements included in this offering memorandum due to reclassification of revenues from services rendered, which have been included in the table above to calculate the gross margin.
(2) We define EBITDA as operating result plus depreciation and amortisation plus provisions.  EBITDA is not a standardised measure and it therefore should not be used to compare one company against another.  EBITDA is not a direct measure of our liquidity and needs to be considered in connection with our actual cash flows provided by operating activities and in the context of our current financial commitments.  EBITDA may not be indicative of our historical operating results nor is it meant to be predictive of our potential future results.
(3) Net fixed assets include tangible and intangible net assets.
(4) EBIT after taxes divided by total consolidated assets excluding financial investments.
(5) Regarding the financial statements as of and for the period ended 31 December 2003, and for comparative purposes, a reclassification of €54.2 million was performed, mainly related to Blocks 32 and 33, from our Refining and Marketing business segment to our E&P business segment.