Can Brazil's Oil Giant Be Saved?
Brazil needs to do something about Petroleo Brasileiro SA, the huge and mismanaged state-controlled oil company now mired in controversy.
Consider the former senior Petrobras executive who was arrested last month for his alleged involvement with a gang that laundered almost 10 billion reais ($4.5 billion). Or a Dutch ship supplier that is being investigated for claims that it bribed Petrobras officials to win business. Then there is the investigation of the awful deals in which the company grossly overpaid for a U.S. refinery and sold another in Argentina far too cheaply.
Even Brazil's President Dilma Rousseff -- the company's chairman at the time of the U.S refinery purchase -- may have indirectly benefitted from Petrobras's problematic dealings, receiving campaign donations from a businessman who sold a refinery to the company, according to the Globo newspaper. If the worst of the latest accusations prove to be true, it would only add to the long list of ills plaguing the energy giant.
The root cause is clear: state meddling. The national government has turned a promising oil concern into a bumbling development agency. For instance, it has forced Petrobras to subsidize fuel prices for Brazilians to the tune of $37 billion since 2011, a practice that has hurt the company's bottom line. And it has mandated that Petrobras purchase oil-services domestically, rather than from overseas suppliers. This has been a major obstacle to increased output.
Engineering problems have become common for a company that was once known as the king of offshore oil production. The resulting project delays have left Petrobras's oil output little changed for at least five years.
Petrobras's underperformance has also stretched its balance sheet. The company has racked up $114.3 billion in debt, making it the world's most indebted oil company. Moody's Corp. reckons that Petrobras already owes $11.5 for every barrel it has in untapped crude reserves. Things are so tight that Petrobras was forced in February to cut its five-year investment plan.
Another notable indicator of Petrobras's woes is its lack of transparency. The company promised last year to disclose its pricing formula for fuel sold domestically, but it has kept it secret, presumably to avoid being accountable to the market and the Brazilian public.
It would all be bad enough if Petrobras were merely burning the money of Brazilian taxpayers. But it has taken shareholders on its value-destroying ride as well. Investors who bought into Petrobras's historic $70 billion public share sale in 2010 have lost their shirts as the company has since lost half of its market value. Meanwhile, the Standard & Poor's 500 Energy Index has almost doubled during the same period.
The talk among analysts these days is whether Petrobras's share price has fallen enough to compensate for its mediocrity. Brazilians have no illusions: 78 percent of those recently polled by Datafolha believe there is widespread corruption at the company.
Nothing will improve unless Brazilians -- the company's real controlling shareholders -- demand change. Brazil's middle class has been outraged enough to complain about poor government services and overspending on soccer stadiums in preparation to host the World Cup later this year. What has transpired at Petrobras may be even more of an outrage.
Whipping Petrobras into shape should be a high political priority for whoever wins the presidency in October. Brazil's energy future and Petrobras's credibility as a public company are at stake.
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James Greiff at email@example.com