New Articles | Petrobras

Coming down with a bump

More problems are revealed at Brazil's oil giant

|SÃO PAULO

By J.P.

NOT long ago Petrobras was the pride of Brazil. It was steward of the biggest offshore oil discovery so far this century and the subject of a record-breaking $70-billion public share offering in 2010. It had become the technological leader among oil giants at finding new reserves. But now the state-controlled behemoth is sinking into a hole as fathomless as its deep-sea oil wells. Every day brings news that ranges from bad to dreadful, much of it the result of a 10 billion reais ($3.7 billion) bribery scheme that was recently unearthed by Brazil’s federal police, aided by the press.

On December 12th Valor, a business daily, published the latest instalment in the sorry saga. It reported that e-mails shown to the newspaper by Venina Velosa, a former Petrobras executive, suggest that she had been alerting her superiors for years to inflated costs at the refining division. She alleges that neither Paulo Roberto Costa, who ran the firm's refining business from 2004 to 2012 and was arrested in a police probe earlier this year, nor his successor, acted on her warnings. Nor, she claims, had Maria das Graças Foster, another recipient of Ms Velosa’s e-mails before and after she was promoted to become chief executive in 2012.

Petrobras responded that Ms Velosa had not aired her concerns to an internal investigation into the irregularities. It added that she had “strangely” held on to her correspondence for five years before bringing it to the press now that she has been disciplined, along with ten other executives, for mistakes which led to costs for building a new refinery in the north-east overrunning by 3.9 billion reais.

If Ms Velosa's claims are true (and Petrobras has not denied them), they are the first to suggest that Ms Foster, a Petrobras lifer and chum of President Dilma Rousseff, may have been aware that something was amiss. According to Mr Costa’s leaked plea-bargain testimony, the mischief involved siphoning 3% of the value of contracts signed with his division off to slush funds for politicians, including Ms Rousseff’s left-wing Workers’ Party (PT) and its coalition allies. Last month the police arrested three-dozen executives from six big construction firms in cahoots with Mr Costa, as well as another former Petrobras bigwig. On December 11th federal prosecutors formally charged 36 individuals with 154 counts of corruption and 105 of money laundering. The next day the first few were formally indicted.

As a result, pressure is mounting on Ms Rousseff to sack Ms Foster—and no longer just from the centre-right opposition. This week Brazil's prosecutor-general, Rodrigo Janot, hinted that new management would be a blessing. But the PT has dismissed Ms Velosa’s allegations as being provoked by the disciplinary action. And according to José Cardozo, Ms Rousseff’s justice minister, “there are no objective reasons to remove the current directors”.

To her credit, since taking the helm Ms Foster has made procurement procedures less opaque and created a compliance department. But there are voices within the PT saying that her position has become untenable. Many others think so, too. Petrobras’s minority shareholders in Brazil are up in arms. So are an increasing number of foreigners. Last month it emerged that authorities in the United States were also looking into the affair, since some Petrobras paper is traded in New York. This week seven American law firms said they had begun class-action proceedings against the company for the multibillion-dollar losses that hit their clients’ investments; Petrobras shares have lost a third of their value in less than a month. The company’s vast pension kitty, brimming with company stock, has been knocked hard. The government, already facing a bulging budget deficit, may one day need to step in to plug the resulting funding gap.

It may also be on the hook for the company’s monumental debt of $135 billion, which the firm is finding increasingly hard to service. If the oil price keeps tumbling, many ultra-deep pre-sal (“beneath the salt”) wells the cash was originally borrowed to finance may become commercially unviable. In October Moody’s, a ratings agency, downgraded Petrobras, citing the firm's high debt and hefty capital-expenditure commitments. On the day of Valor’s revelations the company said it would once again delay the publication of its third-quarter earnings, which were originally due on November 14th but were postponed because past numbers may need restating in the wake of the scandal.

Nor is it just Petrobras that is under the cosh. The future of its army of suppliers, with roughly 220,000 employees, is in doubt. Even state-controlled banks are increasingly reluctant to lend to them. With so many big construction firms in the dock, the fate of 871 billion reais’ worth of infrastructure projects, including for the 2016 Olympic games in Rio de Janeiro, is unclear.

Ideally, Ms Rousseff would follow Mr Janot's advice and replace Ms Foster with an independent outsider to clean up the mess. That would boost confidence, but is unlikely. The president has always made clear that she thinks Petrobras too valuable to hand over to the private sector, which she distrusts. It does not help that the shenanigans would have taken place right under Ms Rousseff’s nose as the firm’s chairman, when she was mining minister to her predecessor as president, Luiz Inácio Lula da Silva. Rather than a bottomless barrel of oil, Petrobras has become a powder keg. A lot of Ms Rousseff’s energy in her second term, which commences on January 1st, will go to preventing an almighty explosion.