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Page added on October 5, 2014
Oil Scandal Mucks Up Brazil’s Elections
When Brazil announced a massive discovery of deep sea oil in 2007, President Luiz Inacio Lula da Silva compared the find to a winning “lottery ticket.” Cashing it in was another story. Standing between Brazil’s oil cache and fortune were at least four miles of seawater, rock, sand and salt, plus a policy sinkhole and — now, we know — a whole lot of muck.
Leave it to Petroleo Brasileiro SA’s experts to finesse the engineering.
Last month, federal police heard key testimony in a corruption scandal that broke earlier this year and has since soiled the name of Brazil’s biggest company, spread to the highest offices in Brasilia and driven the news cycle ahead of this Sunday’s presidential elections.
The star witness is Petrobras’s former refinery director Paulo Roberto Costa, who evidently did much more in his corner office than keep the pumps primed. Costa was arrested in March and admitted to taking part in a massive money-laundering and overbilling scheme that allegedly used the Brazilian oil major to divert hundreds of millions of dollars to political allies of President Dilma Rousseff.
If not for some diligent sleuths, the case might have ended up as one more political mud-fest, ultimately tidied up by clever lawyers and a pact of silence among thieves. Instead, Costa turned state’s witness and confessed to taking a $636,000 bribe in the purchase of a Texas oil refinery, a lousy deal that cost Petrobras $1.25 billion and later forced the company to write off $500 million.
And there was more. Costa went on to describe how Brazil’s signature multinational had basically been converted into a giant ATM, tapping clients to fund political campaigns, including allegedly Rousseff’s.
Shocking as all this may be, it’s not even the worst news for Petrobras. More troubling are the decisions taken by the light of day in Brasilia, where policy makers drunk on resource populism have been busy turning bounty into liability. Today Petrobras is considered the most indebted publicly traded oil company, its market value down 58 percent since 2010.
To appreciate the problem, go back 20 years. To rescue a failing economy, then-President Fernando Henrique Cardoso sold off scores of profligate state companies, ended Petrobras’s monopoly and invited foreign investors to bid for drilling concessions. Capital poured in and national oil output grew by 7 percent a year from 1997 to 2010, legislative oil analysts Ailton Braga and Luiz Bustamante wrote recently in an article for Valor Economico.
Then greed and government got in the way. Convinced that recovering Brazil’s ultra-deepwater oil was a “low-risk” operation, Cardoso’s successor renationalized the business. Lula welcomed foreign contractors, but subordinated them to Petrobras, the sole operator in the so-called pre-salt oil fields. Local content rules obliged prospectors to buy overpriced Brazilian equipment.
But no matter. The fortune salted away under the sea had become a metaphor for Brazil’s hidden virtues. The company’s net worth soared, reaching $223.2 billion in 2010, “behind only Exxon Mobil,” Petrobras announced. Lottery ticket in hand, President Lula hit the road, talking up the world’s newest energy frontier.
Then the music stopped. Drilling auctions were halted, as lawmakers squabbled over imaginary royalties and regulators rebuilt the walls around Petrobras. Production stagnated. To damp inflation, Rousseff capped fuel prices, stoking fuel consumption and forcing Petrobras to eat the loss. No wonder every time Rousseff climbs in the voter polls, Petrobras shares tank.
The damage spread to the nation’s pioneering ethanol sector, where clean-burning fuel distilled from sugarcane can’t compete with subsidized gasoline, threatening a wave of bankruptcies.
More than energy assets are at stake. Petrobras’s rise was once an emblem of the new Brazil and a model for Latin America. When Mexican President Enrique Pena Nieto’s advisers drew up sweeping energy reforms, they looked to Petrobras and Brazil’s reforms 20 years ago. Now Petrobras has become the model to avoid.
6 Comments on "Oil Scandal Mucks Up Brazil’s Elections"
Apneaman on Mon, 6th Oct 2014 12:04 am
Par for the course in the late stages of globalization.
Davy on Mon, 6th Oct 2014 7:19 am
The above ground side of PO and why the economics and politics will help get in the way of allowing oil flows to grow worldwide. Brazil offshore was herald as a great new oil frontier. Now it is languishing by incompetence and corruption. We know the incredible technical challenges below ground in these sub salt deep water deposits but now we see the challenges above ground preventing the below ground efforts from gaining the critical mass needed to get the oil to begin with.
rockman on Mon, 6th Oct 2014 10:47 am
eyond all the corruption Brazil and Petrobras have suffered from the same problem that many US pubcos have in the past: reserves in the ground don’t directly translate to a proportional cash flow. The DW Brazil fields may contain as much oil as offered…maybe even more. But oil in the ground has no value: it has to be produced for the asset to be monetized. And even skipping over the question of exactly how big the development price tag will be is the time factor for the production of a particular field to begin production and at what initial rate. Hundreds of different MSM reports tossing out billions of bbls of oil reserves IN THE GROUND with almost no mention of when the fields will begin producing, the anticipated rate or the costs/economics of each project. I don’t follow the DW Brazil play very closely simply because that info hasn’t been clearly presented. I have no sense of how profitable the play will or won’t be. And with the current political upheaval in the country it may be quite a while before anyone does.
JuanP on Mon, 6th Oct 2014 11:05 am
Rock, I probably know even less than you about this, but my understanding is that oil profits are still a thing of the future down there, if that future ever comes. There has been much financial profit for some, though. 😉
I never expected Brazil to become a net oil exporter, and it hasn’t so far. I still don’t expect them to ever get there. My limited understanding of the technical complexities of this deep sea oil production and the realities of Brazil on the ground led me to this belief. Brazil is a wonderful place, but it has very big problems.
Brazil’s EIA data:
http://www.eia.gov/countries/country-data.cfm?fips=br
Brazil’s energy policies Wiki
http://en.m.wikipedia.org/wiki/Energy_policy_of_Brazil
JuanP on Mon, 6th Oct 2014 11:16 am
WARNING! All should be aware that there are several propaganda campaigns regarding Brazil going on at this time because they are facing critical presidential elections. This election is absolutely critical to the BRICS alliance’s future and plays a very important role in current foreign affairs, but is being hushed down by MSM, IMO.
The US government doesn’t like the current president there and a lot of articles putting down Brazil’s government can be expected. President Rousseff, supported by Russia and China, has her own propaganda campaign going on doing the exact opposite. This is really funny. Expect a lot of lies about Brazil from both sides in the coming days.
rockman on Mon, 6th Oct 2014 9:52 pm
Juan – I hope for the benefit of its citizens Brazil exports very little of their future oil production and utilizes it to grow their economy. Here’s a summery that doesn’t paint a very optimistic future:
Brazil once saw itself as an up-and-coming oil power that would help meet the world’s demand, but it now faces a hard reality and might have to scale back its expectations.
“These companies have the financial muscle and engineering capacity and technologies to move around the world,” said Ramón Espinasa, an oil specialist at the Inter-American Development Bank in Washington. “They are able to pick and choose. And that explains why they are not in Brazil.”
Some oil experts say Brazilian energy planners, who spoke of unproven reserves that could rival those of some of the biggest oil powers, may have vastly oversold the deep-sea bounties, which are called “the pre-salt” because the oil is under a shifting cap of salt.
“There were a lot of government authorities saying the reserves of Brazil were 50 billion barrels, 100 billion barrels, even 240 billion barrels, more than Saudi Arabia,” said Wagner Freire, an oil geologist who worked for 35 years at Petrobras, where he oversaw exploration and production. “Lots of wells have been drilled in the pre-salt area, and the well comes up dry.”
After the discoveries in 2007, then-President Luiz Inácio Lula da Silva famously said God had given Brazil bounties that would propel the country’s modernization. Petrobras was among the world’s 10 biggest companies, admired by investors such as George Soros, and a Wall Street darling.
Petrobras officials envisioned a plan that would give Brazil elite status among the world’s energy producers, with production rising from 2 million barrels a day to 5.3 million in 2020, said the company’s president at the time, JoséSergio Gabrielli.
The projections are more limited today, but they are still ambitious: 4.7 million barrels a day within a decade, according to Energy Minister Edison Lobão. “Considering that at that time our consumption will be close to 3.1 million barrels per day,” Lobão said, “we will be exporting something [like] 1.6 million barrels of oil per day.” Some oil experts say that forecast is unrealistically optimistic.
An official, who spoke on the condition of anonymity because of the delicate nature of relations with energy officials here, said Brazil has found no new basins since 2008 and faces the overwhelming challenge of developing the pre-salt area at a cost of $237 bill. “People are telling us Petrobras won’t be able to handle this,” the official said of what is considered the world’s most expensive corporate investment project.
Petrobras is saddled with mandates and heavy government interference that analysts say have overburdened the company.
Petrobras is required to be the lead operator and is required to have a minimum stake of 30 percent in any new pre-salt fields, encumbering the company with huge financial responsibilities while driving away potential foreign partners. Petrobras is also forced to import and sell gasoline at below-market prices, a policy designed to control inflation. That has cost the company $20 billion since 2008.
“That loss in revenue that the government imposes on Petrobras only obligates Petrobras to take on more debt,” said Adriano Pires, a former adviser to the government’s oil regulator, the National Petroleum Agency. “The government uses Petrobras for its economic and electoral objectives.” The company has responded by selling off assets in Peru, Colombia, Africa and the Gulf of Mexico. Petrobras is also putting off developing other potentially lucrative oil fields here, such as the Sergipe deposit in the northeast, projected at 1 billion barrels.
But the financial markets increasingly see an overextended company. Petrobras stock has recently tumbled, part of a two-year trend that has seen the company lose a third of its value. “They didn’t lose the investment grade, but there are some doubts about the capacity of Petrobras paying its debt and having enough money to invest,” said David Zylbersztajn, an expert on the economics of oil companies and a former director of the National Petroleum Agency.
The pre-salt area is producing 300,000 barrels of oil a day, far less than had been forecast. And nationwide, production remains flat. In one stark episode that shook confidence in the oil sector, the country’s second-most important oil company, OGX, which recorded Brazil’s biggest initial public offering in 2008, declared bankruptcy in October. Most of its wells had come up dry.
The government auctioned off its Libra field, the first auction since 2008. A consortium of companies that included Royal Dutch Shell, France’s Total and two Chinese giants won the license to partner with Petrobras to develop Libra, which is thought to hold up to 12 billion barrels of oil. Chambriard earlier had said she expected more than 40 companies to participate. Only 11 did, and not even half of those opted to bid. Perhaps most startling to energy experts here were the companies that didn’t participate: Exxon Mobil, Chevron and BP, multinationals with capital to develop complex oil basins.
David Mares, an energy scholar who is writing a book about resource nationalism in Latin America, said Brazil may have to rewrite terms to attract more investors at the next auction. “The government has to get this oil flowing sooner rather than later,” Mares says.