Petroleo Brasileiro S.A., aka Petrobras, is arguably the most important company in the Brazilian economy, and, despite the recent corruption scandal, it remains a source of immense national pride. Petrobras deserves credit for its advancement of deepwater exploration and production, including widespread use of FPSO systems and rapid development of challenging pre-salt reservoirs.
The company has set an example by inventing technology and developing its resources, largely by leveraging Brazilian talent and local companies. So it is jarring to hear allegations about decades of kickbacks, Swiss bank accounts, and illegal payments to the country’s ruling party.
A history of innovation. Petrobras drilled the country’s first offshore well in 1947, the same year as the first well in the U.S. Gulf of Mexico. In 1974, the company hit the Garoupa discovery, its first in the deepwater Campos basin, where 50 platforms now operate. Since then, Petrobras has been an innovator in deepwater drilling and completion, and has more experience with FPSOs than any other operator, including the first Gulf of Mexico FPSO.
The rapid development of deepwater pre-salt reservoirs in the Campos and Santos basins also is a major achievement. Petrobras struck the first pre-salt discovery in 2006, and in December 2014 produced 700,000 bopd from 34 wells on 12 platforms. To put this accomplishment in perspective, it took 21 years for the Campos basin and Gulf of Mexico to reach 500,000 bopd in production.
The company had 100% exploration success with its pre-salt wells in 2013, and average per-well production for Santos basin pre-salt wells was 28,000 bopd. Continuous improvement projects have helped Petrobras cut the number of days to drill wells in its Lula and Sapinhoá fields from 120 days in 2010 to 60 days in 2013. Petrobras has technically trained 88,000 energy professionals.
Brazil’s total production from its numerous onshore and offshore basins was 2.3 MMbopd in December 2014, and Petrobras has set a target to reach
4 MMbopd by 2020. Reaching this goal has been put in jeopardy by the 2014 corruption scandal, which is likely to drain resources from the E&P program without regard for the company’s technical and operational achievements.
A drama of corruption. If you haven’t been following the unfolding Petrobras soap opera, here’s a quick summary. Brazilian President Dilma Rousseff previously served as the country’s energy minister, overseeing Petrobras, 50.3% of whose shares are owned by the Brazilian government. In 2014, a few months before elections in which Rousseff would seek her second term, the initial findings of the federal police’s “Operation Car Wash” investigation were made public. The operation targeted corrupt business practices and found that employees of engineering, construction and oilfield service companies had bribed Petrobras officials, in return for inflated contracts. Kickbacks of as much as 3% of the contract values were allegedly paid to over 40 Petrobras managers and Ms. Rousseff’s Workers Party. In the middle of the scandal, Ms. Rousseff narrowly won the October election.
However, The New York Times subsequently reported: 1) that one Petrobras executive surrendered $25 million as part of a plea deal made after his arrest; 2)another executive agreed to return $100 million in kickbacks; 3) a shipbuilding company executive testified that he had paid $23 million in bribes directly to the Workers Party and Petrobras managers, to obtain oil tanker contracts. Top executives for two construction companies were jailed in November. So far, Brazil’s tax watchdog, Receita Federal, estimates that $7 billion was funneled to Swiss bank accounts from 1988 to 2006.
Consequences. Faced with these stunning revelations, President Rousseff dismissed Petrobras CEO Maria das Graças Sliva Foster, along with five other senior executives, and replaced her with Aldemir Bendine. Most recently, the chief executive of Banco do Brasil, Mr. Bendine has no oil industry experience and is politically connected to the Workers Party.
The potential repercussions of the Petrobras crisis are huge. Petrobras and its suppliers contribute at least 10% of the country’s GDP, and disruption of their business could tip Brazil into a recession. Petrobras has $110 billion in debt, and its market capitalization has fallen $80 billion in the past year. Investors and lenders have backed away from providing further financing, and Petrobras announced a 30% cut in its capital budget, indicating that it will sell some of its assets.
Petrobras suppliers will suffer as well, and not only from loss of future sales to the oil giant. The oil company has halted payments on contracts implicated in Operation Car Wash. Brazilian suppliers also may be cut off from capital markets. This includes drilling contractor Sete Brasil, construction company Alumini, and the engineering firm OAS, which, according to Reuters, are all having difficulty renegotiating terms with their creditors.
The scandal, which has inauspiciously coincided with the precipitous drop in oil prices, is likely to reduce E&P activity offshore Brazil through 2015. Unfortunately, the damage to Petrobras’ reputation as an admired technology leader, and an unshakeable foundation of the Brazilian economy, will linger much longer.
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