She doesn't have a lot of options.

Photographer: Vanderlei Almeida/AFP/Getty Images

Petrobras Has a $13.7 Billion Yard Sale

Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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Staggered by $135 billion in debt and scandal, Brazilian state-run oil giant Petroleo Brasileiro SA has announced plans to offload some $13.7 billion in assets. Officials claim this is not a plan to raffle the jewel of the government crown. Instead think fire sale, a maneuver to raise cash and keep creditors at bay. 

The move plays like a scene in a script coming full circle. Luiz Inacio Lula da Silva once joked that back in the 1990s, when he was still the country’s ranking lefty and not its president, "people trembled” whenever he passed by the door of the Sao Paulo stock exchange. "There goes that devourer of capitalism," they’d say. 

Yet scarcely more than a decade later, Lula, a self-described "walking metamorphosis," was at Bovespa as president of Brazil, hosting the feast as the state-run oil giant went on the bloc in one of the world's biggest public stock offerings. "Capitalization," he beamed in 2010, "is one of the safeguards the government has to assure that this wealth doesn't get lost to the labyrinths of waste and dubious interests."

Tell that to prosecutor general Rodrigo Janot, who just handed the Supreme Court a list of 54 lawmakers and government officials suspected of looting the country's flagship multinational for political gain.

So labyrinthine is waste and corruption that the new management -- the old one resigned in disgrace -- has yet to file the 2014 balance sheet, which is one reason why Moody's Investor Services recently downgraded Petrobras paper to junk. 

The fire sale Petrobras is planning may prove difficult. With crude prices slumping, it's a buyer's market for rigs and refineries.

Meanwhile, the ruling Working Party and union rank and file, who see a plot to privatize Petrobras by stealth, have called for a mass protest March 13  to defend the company and roll back austerity measures announced by Lula's successor, President Dilma Rousseff. 

Leading the charge, strangely enough, is Lula himself, who exhorted companheiros to stand up to bottom-feeding "neoliberals." This was wagging the dog. It's not the market-friendly opposition that threatens Brazil's biggest brand, but repeated government attempts -- first by Lula, then Rousseff -- to suspend the basic rules of economic gravity. The devourers of capitalism had become the devourers of Petrobras.

Under the previous regime, Petrobras lost its longstanding monopoly as Brazil opened the oil market to private prospectors under a concessions model. That forced the cosseted state-run, but publicly traded company to compete with the best in the business for deepwater oil fields and made it a better company.

Then came the motherlode, the biggest cache of oil in the Western Hemisphere in three decades. Lula called that horde "a winning lottery ticket" and retooled Petrobras as a monopoly to collect the prize. Out went the concessions model. In came production sharing, where Brazil called the shots from the wellhead to the oil drum for new ultra-deep fields. Foreigners could could join in, but only as junior partners to Petrobras.  

But although Petrobras had the engineering prowess, it lacked both the administrative acumen and the resources to oversee the underwater equivalent of a moonshot: a new energy frontier, lying under four miles of sea, rock and salt.

Instead of protecting Petrobras, laws requiring most oilfield equipment to be sourced locally became not just a burden, but a welcome mat to corruption. "It's common knowledge that Petrobras ended up overpaying for inferior equipment and services delivered in the shadows," says Alberto Ramos, an analyst with Goldman Sachs.

"Because Petrobras is so huge, the worry now is that its problems could easily spread beyond the company's core business to other sectors, with systemic implications for the economy," said Ramos.

Rescuing Petrobras is unlikely unless the controlling shareholder rethinks the business model and treats its oil major "not as a political cash cow but as a corporation," said David Zylbersztajn, former head of the Brazilian oil regulator, the National Petroleum Agency.

The good news is, Rousseff may have no choice. "Bit by bit, reality is sinking in,"says economist Adilson de Oliveira, an energy specialist at the Federal University of Rio de Janeiro. "Repealing the concession model was a monumental mistake. The question is how long it will take the political class to get that." Cue Brazil's walking metamorphosis.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mac Margolis at mmargolis14@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net