Petrobras CEO Lost Job Over a $30 Billion Disagreement

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As the kickback and money-laundering scandal engulfing state-run oil giant Petrobras escalated in late January, Brazilian President Dilma Rousseff got calls from two of her top appointees. They were in the midst of a marathon board meeting and they heatedly disagreed.

The first was from her former finance minister and current Petrobras chairman, warning her that the board was discussing the release of a potentially embarrassing number: a $30 billion writedown that company auditors were saying was partially tied to scandal-related losses. The chairman left in the middle of the meeting to call his political benefactor to discuss releasing it -- believing it was a bad number conjured up by faulty methodology. Rousseff agreed.

The second call, later in the same evening, came from Maria das Gracas Foster, the Petrobras chief executive officer whom Rousseff had appointed three years earlier. She expressed the opinion that under Brazilian law the $30 billion figure, whether faulty or not, had to be released because if the board now knew the number, the market had a right to know as well.

Foster was aware Rousseff preferred the number not be released and hoped her close friend the president would understand her position, according to three people privy to Foster’s thinking but who asked not to be identified because they aren’t authorized to speak.

Share Tumble

After a dramatic 10-hour boardroom showdown, the number would be included in a note to Petrobras’s overdue third-quarter earnings but it would be costly to Foster. On Feb. 6, Rousseff replaced her with Aldemir Bendine, CEO of state-run Banco do Brasil SA -- a government executive popular with Rousseff’s leftist Workers’ Party.

The appointment sent the shares of the company formally known as Petroleo Brasileiro SA down 6.9 percent that day. To critics, Rousseff’s actions show she is caught between her populist leanings to continue to run Petrobras as an energy adjunct of the state and the need to right the badly damaged company as a key component in reviving Brazil’s faltering economy. Some doubt Petrobras can reach its ultimate potential without resolution of this conflict.

“Look at all the government interference -- the market was expecting a more independent management to restore credibility,” said Marcos Duarte, a portfolio manager at Rio de Janiero-based Polo Capital Gestao de Recursos Ltda. “His appointment didn’t help.”

Critics Misunderstand

Rousseff, who declined to be interviewed for this story, had defended Petrobras. She said the recent downgrade of Petrobras’s debt to junk-bond status by Moody’s Investors Service reflects a fundamental misunderstanding by company critics.

“It’s a lack of direct knowledge of what’s actually happening at Petrobras,” the president told reporters on Feb. 25. “I have no doubt that Petrobras will be a company with great capacity to recover from this, without huge consequences.”

Rousseff’s replacement of Foster also has ruptured the long-held bond of loyalty the two forged over more than a decade as business and political allies rising up in the ranks among a sea of powerful men. Foster’s departure further helps to isolate Rousseff as Foster joins a cadre of onetime close supporters who have been swept aside in various government dust-ups.

Foster didn’t respond to requests for comment. The account of how she and Rousseff parted ways was put together after interviews with more than 20 people -- executives, government officials, consultants and academics -- some of whom asked to not be identified because they aren’t authorized to speak.

Darling to Shame

For Brazil and millions of ordinary Brazilians, Petrobras has become both an embarrassment and a source of anger even as they hope for a rebound. Only five years ago, the company was the darling of the global energy world, able to raise a staggering $70 billion at a share sale because of deep-water oil and natural gas finds so huge that they were expected to propel Brazil to decades of growth.

Petrobras has lost $270 billion in value since it peaked at a market capitalization of $310 billion in May 2008. Its vast offshore reserves offer Petrobras a way out of this morass -- assuming it gets back to the basics of oil and gas. Shares fell 2.3 percent to 9.38 reais at 10:29 a.m. in Sao Paulo.

Given its massive reserves and recalling the exploration verve that led the company to those finds a decade ago, “Petrobras is still an industry leader,” said Bob Fryklund, vice president of energy consulting firm IHS CERA.

Petrobras declined to comment for this story.

First Shockwaves

The first allegations of Petrobras corruption came in March of last year when police arrested a former refining chief for the company, accused of colluding with a well-known Latin American money launderer to hide or distribute kickbacks as part of the plan to inflate construction contracts. Some of the money launderers ran an operation out of a gas-station chain, which gave the investigation its name: Carwash.

Foster, however, seemed to be weathering the storm until October, when video tapes published online by a federal judge in a Parana, Brazil, court showed that same executive confessing to investigators that Petrobras had long been compromised -- that for at least nine years he and others siphoned millions in kickbacks from companies to whom Petrobras awarded inflated construction contracts.

The money went to finance campaigns and bribe politicians through intermediaries to guarantee they would vote in line with the ruling party while enriching themselves, according to the tapes, which riveted all of Brazil.

Growing Outrage

As allegations of wrongdoing escalated, the public became more outraged and investors continued to dump Petrobras shares; the hard-charging Foster found the political weather turning foul.

The next thing Foster knew, she was up against a well-connected former Brazilian senator who also ran a Petrobras transportation unit. He would eventually be named in the bribery scheme in the video-taped testimony released by the court. But as Foster moved to fire him, he told her she better “solve this in Brasilia” -- meaning, she’d better consult with Rousseff over the political ramifications before shoving him out, according to a person familiar with the conversation who asked not to be named because they aren’t authorized to speak.

The senator took three months unpaid leave before eventually stepping down. He has denied any wrongdoing. On Tuesday, Brazil’s prosecutor general asked the Supreme Court to authorize a probe of senior politicians for their roles in the scandal, without releasing their names.

Warnings Signs

Things turned even uglier for Foster when a long-time employee who ran Petrobras’s supply-chain unit went public with claims Foster had ignored warnings signs about graft at projects now under investigation.

Foster denied it and she has never been accused by investigators of any wrongdoing. But almost daily updates from the Parana court presiding over the corruption investigation kept the story alive in financial markets, on the streets of Rio de Janeiro where Petrobras is based and most notably in the press.

Throughout the ordeal, Foster had offered to resign several times. Rousseff wasn’t having it, according to those people familiar with her thinking. She thought Foster had been doing her best to root out those involved in the scandal -- she had already removed three executives -- and shouldn’t be forced out simply because of public opinion. Foster herself told reporters at a Dec. 17 press conference that she would keep the job as long as she had the president’s trust.

Old Friends

But the scandal kept escalating. A growing list of former executives started cooperating with investigators, hoping for reduced sentences. Cash deliverymen went by flamboyant nicknames such as Big Tiger, Watermelon and Eucalyptus, according to testimony before the Parana court. One former Petrobras manager admitted to taking as much as $100 million in kickbacks as part of a plea bargain deal.

As the drama unfolded, the one constant was Rousseff’s support for Foster, the woman she met in the early 2000s when she was an energy secretary for a southern state of Brazil and Foster was Petrobras’s representative for a gas pipeline to Bolivia.

This trust began to unravel in December, when Foster decided to ban 23 construction companies caught up in the probe from doing business with Petrobras, according to a person familiar with the situation. Rousseff’s public position was that corrupt individuals -- not the companies that employed millions of Brazilians and worked on strategic infrastructure projects -- should be held accountable.

Audit Block

Another source of tension was to get Petrobras’s results properly audited. The move was necessary if Petrobras was to regain access to foreign debt markets so it could finance development of offshore oil and gas finds, dating to the past decade, that were the biggest in the country’s history, according to people familiar with the discussions.

This came as Rousseff was starting her second term after a debilitating campaign in which the opposition blasted her for her previous role on Petrobras’s board from 2003 to 2010. Brazil’s economy was stalled. Rousseff was facing the prospects of imposing austerity measures. Both Brazil’s and Petrobras’s debt ratings were under pressure from ratings agencies which had put them on a negative watch. The last thing she needed was a damning audit.

‘Enough, Huh?’

Then came the contentious Jan. 27 board meeting. During that meeting, Foster found herself at odds with Guido Mantega, the Italian-born, left-leaning Petrobras chairman with a public reputation as a Rousseff yes-man even though she had relieved him of his job as her finance minister earlier that month. Making that point: Rousseff’s frequent dressing down of Mantega has become a favorite topic of Brazilian TV comedians. Her character usually yells, humiliates and curses Mantega in loud phone calls, and then quickly shifts to kind treatment.

Mantega declined to comment for this story.

Foster knew that a fight with Mantega was a fight with Rousseff. But at some point, with the back and forth exhausted, Foster signaled to her management team and declared “enough, huh?” according to people who were in the room.

Mantega controlled a majority on the ten-person board and if his forces prevailed in squelching release of the $30 billion figure, she and her executives would resign on the spot, according to people who were in the meeting. Mantega and his allies said that Petrobras’s auditors couldn’t really separate corruption costs out of the potential massive write down, and at rate they didn’t think disclosure was required in this case. But he relented when three independent board members threatened to go to Brazil’s securities regulator and force disclosure anyway, these people said.

Summoned by President

The victory was short-lived. A week later, on Feb. 3, Foster was summoned by Rousseff to the presidential palace about 465 miles (750 kilometers) away in Brasilia. After two hours of candid discussion, the two came to terms. Foster and her executive team would be replaced by month’s end while a search for successors proceeded, according to people who have knowledge of the meeting but aren’t authorized to speak.

“Foster was fired for her virtues, not her flaws,” said Adriano Pires, the head of Rio de Janeiro-based consultancy CBIE.

Foster then boarded a commercial flight back to Rio de Janeiro and was booed by other passengers. There was no relief back home. Dozens of protesters greeted her at her Copacabana apartment, banging pots and pans outside her door, demanding she resign.

No Choice

The CEO was still willing to stay on until Rousseff named a replacement but in a conference call from Brasilia with her five-member executive staff they declined to continue as lame ducks. Since Foster had said publicly she would never serve without her team, she had no choice but to go. The announcement came on the morning of Feb. 4 in a one-line regulatory filing that took the market by surprise.

What Rousseff did in the two days after Foster’s resignation, her critics say, demonstrate how isolated she has become. Rousseff had two days to announce a successor -- the Petrobras board was scheduled to meet on Feb. 6 to take up the matter. Her goal was to find someone who would inspire investor confidence without exerting too much independence.

Bendine, the Banco do Brasil CEO, volunteered for the job. He told Rousseff he had the financial expertise to work with regulators and win confidence of financial markets, a person privy to the situation said. She was convinced.

Press Leak

She shared her decision with only a handful of people until the morning of Feb. 6 as the board meeting was getting underway. As the name started circulating in the presidential palace, someone leaked it to the press.

Thus, Petrobras’s board learned that Bendine was Rousseff’s chosen one from news accounts. The tanking of Petrobras’s stock surprised Rousseff but not critics. True, Bendine had led a major state bank -- but in the direction desired by the government. That wasn’t what the market wanted.

Petrobras’s independent board members, who hadn’t even begun discussing possible successors, were furious. “We saw today one more episode of disrespect to the board,” Mauro Cunha said in a statement after the meeting.

Similar Temperament

To those who know them well, Rousseff and Foster share a similar temperament. They are both strong women used to getting their way in oil and politics, careers dominated by men in Brazil. Both have a reputation for yelling at subordinates and firing executives in front of others, according to insiders who have seen both women in action but asked not to be identified because they aren’t authorized to speak.

When Rousseff met Foster in the early 2000s, it was a professional disagreement that sparked the friendship, according to people familiar with the relationship. Rousseff, then a regional energy secretary, got a resounding “no” from the Petrobras executive for her gas pipeline plans. She was drawn to a woman as headstrong and confident as herself.

When former union leader Luiz Inacio Lula da Silva came to power in 2003, he chose Rousseff to be his energy minister, who then invited Foster to take a leave from Petrobras to be her oil and gas secretary, her highest-ranking subordinate at the time.

Rousseff and Foster would often be the only women in rooms full of men, as a team keeping their cards to themselves. People who observed them often said Rousseff would be seen being bossy with Foster -- but would also call her “gracious” in private, a play off Foster’s maiden last name that translates to grace, according to these insiders.

Lula Respect

Foster returned to Petrobras and in 2007 became gas and energy director, one of several executives who reported directly to the CEO at the time. Rousseff had become Lula’s chief of staff and Petrobras chairwoman, where she served until 2010 when she was elected Brazil’s first female president.

Rousseff initially kept Jose Sergio Gabrielli on as Petrobras CEO, out of respect for Lula, and it wasn’t until early 2012 that she named Foster as his replacement.

Rousseff’s and Foster’s relationship was based on loyalty, a trait Rousseff learned to prioritize during her resistance to Brazil’s dictatorship in the 1960s and 1970s. To this day she trusts a very small group of people, even recently putting distance between herself and her mentor Lula. With Foster in retirement, she has one less professional shoulder to lean on.

Huge Challenges

Petrobras continues to face huge challenges. With its market value shrunken, its debt ratings in the tank and its global image tarnished, it desperately needs to get back to basics. Over the past decade, its oil and gas production has lagged the company’s own projections -- due to equipment delivery delays, maintenance issues and faster-than-expected declines in its older fields -- even though that is starting to change.

Starting in 2007, stupendous deepwater offshore finds in an area known as the pre-salt had exponentially raised its reserves. Those discoveries still afford Petrobras plenty of potential upside assuming they are managed properly, analysts say. The most productive of its pre-salt wells pumps 35,000 barrels of crude a day. At the Bakken shale formation in North Dakota it takes more than 300 wells to pump that much.

That’s in the top one percent for “all oil wells on the planet,” said Cleveland Jones, a geologist and researcher at Rio de Janeiro State University.

Pre-salt output went from almost nothing in 2009 to a third of the company’s domestic production now. That said, the fields are expensive to operate and not without risks. Petrobras is already managing the largest fleet of deepwater production vessels on the planet.

Deepwater Risks

Memories of BP Plc’s 2010 Gulf of Mexico spill, the biggest in U.S. history, are reminders of how horribly wrong deepwater drilling can go. During Bendine’s first month on the job, an explosion wracked a gas platform operated by a subcontractor. Nine people were killed or remain missing and the platform remains closed as an investigation continues.

Still, Petrobras has lots going for it. “The company has done a good job of trying to efficiently develop the offshore assets it has in a challenging political environment,” said Chris Kettenmann, chief energy strategist at Macro Risk Advisors. “With the Petrobras story, it’s important to stay focused on the quality of the assets underlying the company.”

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