Petrograft

It’s difficult to overstate the seriousness of the impact the Petrobras corruption scandal will have on Brazil’s oil and gas industry, with even top politicians now being accused of involvement in an enormous kickback scheme.

Until this scandal broke, there were hopes that Brazil was breaking away from the South American tradition of oilfield development going hand-in-hand with corruption and mismanagement, resulting in stagnation of the whole industry.  With Brazil choosing to channel the bulk of its future development through the state-owned Petrobras, particularly the deepwater and pre-salt fields, such hopes may have seemed a little optimistic.  However, at the operational level Petrobras seemed to be doing quite well, and the capability of Brazil’s indigenous construction yards and engineering houses increased considerably thanks to strong local content laws.  While some questioned whether the Brazilian contractors had the capacity to meet Petrobras’ colossal development plans, few doubted that Brazil was by some distance the country with the most promising major oil and gas development future.

All those thoughts have now vanished, and instead we’re seeing a picture which has become depressingly familiar: massive scale corruption in Petrobras which starts at the very top (the CEO and other top directors have resigned) and spreads both upwards into politicians at the highest level and downwards into the contracting firms supplying services to the national giant.  Even though it is the former which will make the headlines, the real damage to the industry is probably being done by the latter.  The Brazilian contracting companies had been set up specifically to meet the enormous demand for vessels, pipes, and other equipment necessary to realise Petrobras’ highly ambitious development plans, and foreign companies had been deliberately kept out (or forced to take a junior role in partnerships with local firms).  Now it seems almost all the major players are under investigation and hence banned from carrying out any more work for Petrobras, which for most is their only client.  Without any work, these companies are beginning to lay off thousands of workers.  I wonder how they feel about the CEOs and politicians who have brought this about?

With the number of individuals and companies being added to the already long list of subjects for investigation growing daily, and with Petrobras also being hit with a lawsuit in the US, it is difficult to imagine clear investment decisions and contract awards taking place any time soon.  The investigations alone will take years, followed by trials, and then the new management will be under the spotlight and wary of doing anything which might be deemed untoward.  Meanwhile, the order books in the fabrication yards will stay empty as the whole industry moves forward at the pace of a snail in an environment that was already proving difficult:

Brazil’s troubled oil giant Petrobras is inching forward with its offshore development projects in the pre-salt province, but a major rescheduling looks increasingly likely.

Conversion and integration work is continuing at several local shipyards on one of these projects, aimed at deploying four big floating production, storage and offloading units on the Buzios field — an area awarded directly by the Brazilian government as a transfer of rights. However, the work is progessing at a sharply reduced pace and intensity.

The delay was apparently due to bureaucratic wrangling with port authorities, although the turbulent political backdrop did not help, sources said.

“The corruption scandals affecting Petrobras have slowed everything down, but to be honest this delay was more due to the kind of administrative tangle that plagues business in Brazil,” commented a source working close to this project.

Like most Brazilian contractors, EBR’s cashflow has been squeezed by the liquidity crunch affecting the sector amid the now infamous corruption scandal within and around Petrobras.

Yard sources consulted by Upstream this week said Petrobras was managing to make basic contractual payments, but was postponing unscheduled items, such as modification orders.

The EBR consortium is surviving on these monthly contractual payments from Petrobras and drawing on some of its own capital. It is one of the few yards hiring in the fledgling offshore industry hub centred in Rio Grande, southern Brazil. Rival yards ERG and QGI have both been shedding workers in recent weeks.

The bribery scheme that police investigations and judicial plea-bargaining tactics has unearthed at Petrobras have virtually closed the door to orthodox financing for Brazilian suppliers, and the oil company’s delay in releasing audited financial statements for 2014 has made credit scarcer still.

In short, despite the early promise, Petrobras has proven to be yet another mismanaged and corrupt national oil company in a mismanaged and corrupt country.  We really shouldn’t be surprised.

“I name this vessel Apt Metaphor.”

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2 Responses to Petrograft

  1. dearieme says:

    “these companies are beginning to lay off thousands of workers. I wonder how they feel about the CEOs and politicians who have brought this about?” I don’t know, but possibly they lead their lives in the same corrupt way. That’s roughly what “culture” implies, isn’t it?

  2. Jake Barnes says:

    Yes, that is a very good point: the same forms of corruption were probably present right down to the tea boy.