The Petrobras scandal: year in review 2015

Paulo Sotero – Encyclopædia Britannica, 9/15/2015

After much delay and controversy, on April 22, 2015, a somber-looking team of newly appointed managers at Petrobras announced at a press conference in Rio de Janeiro that Brazil’s giant majority state-owned oil and gas company had lost $17 billion to mismanagement and graft. Moreover, they said that the company would have to sell almost the same amount in assets and postpone investment plans to regain its financial footing. With Petrobras’s market value reduced by half and burdened by a $100 billion debt, the firm further acknowledged in documents filed with the U.S. Securities and Exchange Commission (SEC) in May that it would have to revise its ambitious program of investments. “We have a feeling of shame,” said newly named CEO Aldemir Bendine, describing the company as a victim of extensive wrongdoing. “I offer an apology on behalf of Petrobras’s employees, because I am now one of them,” he added before presenting the first audited balance sheet that the company had been able to produce in more than eight months.

The malfeasance was revealed by a federal investigation begun the previous year under the code name Lava Jato (“Car Wash”). The massive scheme to defraud Petrobras—Brazil’s largest enterprise and a symbol of the country’s entrenched economic nationalism—did not fully come to light, however, until after the narrow reelection of Pres. Dilma Rousseff on Oct. 26, 2014. By the time of her second inauguration, on Jan. 1, 2015, Rousseff’s approval rating had collapsed to 14%, with some two-thirds of Brazilians blaming her for Petrobras’s troubles.

Dubbed “Petrolão,” after “Mensalão,” the vote-buying scandal that had plagued the government of Rousseff’s predecessor and mentor, Luiz Inácio Lula da Silva, the episode came to be viewed as the largest corruption scandal in Brazilian history. Its political and economic repercussions were still being measured more than a year after the first disclosures were made in March 2014. By June 2015 a massive scheme to defraud Petrobras on contracts to develop the so-called pre-salt oil reserves found offshore in 2007 appeared on investigators’ radar. Moreover, reports suggested that federal prosecutors were also looking into the electricity-generating sector, pension funds for employees of state-owned companies, and the National Bank of Economic and Social Development (BNDES). The latter had provided billions of dollars in subsidized financing to Petrobras and other “national champions,” such as billionaire Eike Batista, whose wealth plummeted spectacularly in 2013.

Given Pebrobras’s size and the breadth of its reach in the country’s economy, Samuel Pessoa, a leading economist, projected that the company’s woes would reduce Brazil’s GDP by 0.75% in 2015, enough to plunge the faltering Brazilian economy into recession and deepen a crisis of confidence brought about by macroeconomic mismanagement by the Rousseff administration during its first term and the creative accounting it employed in a futile attempt to disguise growing fiscal deficits and inflation. “State capitalism does not work well in democracy,” said Finance Minister Joaquim Levy, speaking the day after millions of Brazilians responded to opposition calls to mark the 30th anniversary of the reinstatement of democracy, on March 15, 2015, with a day of street protests. The Petrobras scandal was expected to reverberate for a long time and to alter the political landscape, producing a centrist realignment away from the leftist Workers’ Party (PT) of Lula and Rousseff and its preference for state control of the economy.

By July—with her popularity reduced to single digits in opinion polls and the IMF having projected a contraction of 1.5% for the country’s economy for the year—Rousseff found it necessary to state in an interview with the daily newspaper Folha de São Paulo that she would not resign from the presidency and would fight “tooth and nail” any attempts to impeach and remove her from office, a possibility that was seen as increasingly probable by leading politicians and media analysts. A former technocrat with limited political skills but a reputation for personal honesty that was recognized even by her adversaries, the president was reportedly livid at allegations of her involvement in the scandal. “I will not pay for somebody else’s crap,” a furious Rousseff reportedly told advisers before departing for an official visit to the United States on June 28, according information leaked to Folha de São Paulo and not denied by the president’s press office.

Testimony given under plea-bargain agreements by several individuals implicated in the Petrobras scandal, including two former senior managers of the company and the CEO of one of the implicated construction companies, exposed a cartel-like criminal conspiracy set up and run from within the company after 2003, during a period when Rousseff chaired the company’s board of directors as minister of mines and energy and chief of staff of the Lula administration. For more than a decade, Petrobras’s managers allegedly had acted with senior executives of firms that supplied goods and services to Petrobras (including Brazil’s largest construction companies) to inflate prices of Petrobras contracts in an effort to skim as much as 3% off each contract on a prearranged rotating basis. Some $2.1 billion allegedly was redistributed in this manner for the personal gain of the scheme’s operators and to finance campaigns of dozens of politicians, mostly from the Workers’ Party and its partners in the government coalition, most notably the Party of the Brazilian Democratic Movement (PMDB). Pedro Barusco, a third- tier executive who reported to Renato Duque, Petrobras’s director for engineering and services, agreed to return $100 million he had stolen from the company and deposited in foreign bank accounts. The company’s former director of refining and supply, Paulo Roberto Costa, confessed to having received bribes and agreed to pay back $23 million.

More than 30 individuals were arrested in operations carried out nationally by federal police starting in mid-November 2014. The accused were taken to a detention centre in Curitiba, the southern city in which federal judge Sérgio Fernando Moro presided over the case. Among those directly implicated were the CEOs of the major construction companies OAS, Queiroz Galvão, and UTC, along with senior executives of the construction firms Camargo Corrêa and Engevix, as well as senior executives of the oil firm IESA. On June 19, 2015, the CEOs of two of Brazil’s largest construction companies, Marcelo Odebrecht (of the Odebrecht Group) and Otávio Marques Azevedo (of Andrade Gutierrez S.A.), were arrested, under Judge Moro’s orders. In July the CEO of Camargo Corrêa, Dalton dos Santos Avancini, along with the company’s chairman and a senior executive, was convicted of money laundering, corruption, and other charges related to the scandal. More than 50 members and former members of Congress were targeted by prosecutors in criminal investigations—among them the president of the Senate, Renan Calheiros; the speaker of the Chamber of Deputies, Eduardo Cunha; and Lula’s former minister of finance, Antonio Palocci, who served briefly as Rousseff’s chief of staff before being ousted in a separate lobbying scandal. Also targeted were the former minister of mines and energy in Rousseff’s first term, Edison Lobão, a protégé of former president José Sarney, and former president Fernando Collor de Mello, who had returned as a senator from Alagoas a decade after his 1992 impeachment as president on corruption charges, of which he was later cleared by the Supreme Court. By March 2015 federal prosecutors had formally accused 110 people of corruption, money laundering, and other financial crimes.

Class-action suits brought against Petrobras by investors and investigations opened by the SEC and the U.S. Department of Justice under the Foreign Corrupt Practices Act (1977) added to the pressure the scandal generated for improving Brazil’s corporate governance. On a brighter side, the scandal was seen as an affirmation of institutions charged with enforcing the rule of the law in Brazil and a watershed event in a country notorious for its tradition of impunity for people in high places accused of crimes of corruption.

Article authored by the Brazil Institute director Paulo Sotero on the corruption scandal involving Brazilian state oil giant Petrobras, published September 15th in the Encyclopædia Britannica online, 2015 in the Year in Review, available here.

Oil workers union strike hurt production, Brazil’s Petrobras says

Will Connors – The Wall Street Journal, 11/3/2015

Turmoil at Brazil’s state-run oil company Petroleo Brasileiro SA deepened late Tuesday, as the company said a strike by Brazil’s biggest oil workers union stopped a significant amount of oil and gas production, and that the company’s alternate board chairman was stepping down just two months after his appointment.

Petrobras said that the strike affected 13% of the company’s daily oil production and 14% of the company’s daily natural gas production on Monday. The strike affected 273,000 barrels of oil production and 7.3 million cubic meters of natural gas production, the company said.

The Oil Workers Federation, or FUP, began the strike on Sunday to protest a series of asset sales by Petrobras after the union held more than three months of negotiations with the company. The FUP represents platform and refinery workers, among others.

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Pimco sues Brazil’s Petrobras for fraud

Will Connors – The Wall Street Jounal, 10/20/2015

Add giant investment firm Pacific Investment Management Co. to the list of entities suing Brazil’s troubled state-run oil company Petroleo Brasileiro SA.

California-based Pimco claims in its lawsuit that Petrobras misled investors about the scope and scale of a vast corruption scandal that has wiped billions of dollars in value from Petrobras’ books.

Pimco is the latest among a long list of plaintiffs seeking to recoup money they lost as a result of the scandal, and the suit is yet more bad news for Petrobras as it struggles to restore its reputation and sell assets to reduce its ballooning debt pile.

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Brazil bull who got it right in 2002 says this time no different

Julia Leite and James Crombie – Bloomberg Business, 10/18/2015

The selloff punishing Brazilian markets in recent months isn’t fazing Jerome Booth. He’s seen it before and says just like then, it’s way overdone.

Yes, Brazil has serious problems. The country’s “a mess,” he says, with a massive corruption investigation at state-run oil company Petroleo Brasileiro SA, a worsening fiscal outlook, the steepest recession in 25 years and a political system so fractured that needed reforms just aren’t getting done. That’s not to mention a credit-rating cut to junk and the currency’s plummet to a record low.

But there’s no chance the government is going to default, and politicians eventually will find the will to push through measures to shore up the budget and restore growth, Booth said in an interview in New York. The panic among investors is excessive, just like 13 years ago when bond prices collapsed along with the currency amid concern the front-runner in presidential elections would repudiate the government’s debt, said Booth. He was then head of research for Ashmore Investment Management, at the time one of the biggest dedicated emerging-market sovereign bond holders.

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Brazil’s Petrobras raises fuel prices

Rogerio Jelmayer – The Wall Street Journal, 9/30/2015

Brazil’s state-run oil company Petróleo Brasileiro SA said it will raise fuel prices across the country with immediate effect.

Petrobras, under a new administration, will raise gasoline prices by 6% and diesel prices by 4% at its refineries, the company said in a news release late Tuesday. Any change to prices at the pump is still unclear, as they are set by gas-station owners.

Petrobras needs to import gasoline and diesel fuel to meet domestic demand. The weakening of the Brazilian currency, the real, against the U.S. dollar has made those imports more expensive.

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Brazil’s continuing corruption problem

Donna Bowater – BBC News, 9/16/2015

When Petrobras was named the most ethical global oil and gas company in 2008, few would have imagined that the company would now find itself at the centre of the biggest corruption investigation in Brazilian history.

But a criminal probe is indeed continuing into alleged corruption at Brazil’s largest business. A number of directors at state-run Petrobras are accused of taking bribes from construction companies, in return for awarding them lucrative contracts.

Public prosecutors and federal police claim that bribes of up to 5% of contract values were being skimmed off.

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Sins of Brazil’s Labor Party haunt local business

Kenneth Rapoza – Forbes, 9/13/2015

Last week, a Brazilian court said that ex-president Luiz Inacio Lula da Silva might have been involved in the ongoing Petrobras scandal. They are investigating whether he received any kind of kickbacks from the oil major that helped him or his top party officials fund campaigns, among other things.

The operative word here is “might” have been involved. But with public perception so negative on Brazil, both on the streets and in the markets, Lula might as well be a hanged man. Clearly, the Workers’ Party he created is in shambles. Many of its founders and top officials over the last decade have been put in jail. Some released, like ex-Finance Minister Antonio Palocci, and others still serving time, like Lula’s ex-chief of staff Jose Dirceu. The Petrobras scandal may have destroyed Lula’s Party, known there as PT.

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