Monday, July 25, 2016

Petrobras At Risk As Brasil's Endless Crisis Deepens


Petrobras at risk as Brazil’s endless crisis deepens

Image of Nick Butler
With so much attention focused on the questions of Brexit and the American presidential election it is miss the problems of other parts of the world. Latin America is a prime example of a continent easily forgotten. But while there may be a sort of peace agreement between the government and the rebels in Colombia, in Venezuela the economy continues to disintegrate and in Brazil the whole structure of society appears to be unravelling.
I will look at Venezuela in a later post. For now let’s consider Brazil. Over the next few weeks international audiences will be swamped with TV coverage presenting the glamorous image of the Olympics, which Rio is hosting for the first time. But behind the pictures of the Christo Redentore statue and no doubt some stunning performances from the athletes, there is a dark side to a country crippled both by a recession as bad as anything seen in the last century and by a deep loss of confidence in the institutions of government and commerce.
A powerful article published at the beginning of July by the Brazilian journalist Vanessa Barbara describes “Brazil’s Olympic catastrophe”. Public funds have been diverted to pointless Olympic projects leading the local state of Rio de Janeiro to declare “a state of public calamity” because it has run out of money. Street children, of whom there are perhaps 20,000 in Brazil, are being rounded up and put into detention centres to keep them out of sight of the Olympic dignatories and the world’s media.
At the heart of it all, inevitably, sits Petrobras, the state oil company — the embodiment of both the best and the worst of Brazil. On the one hand a highly competent, and technically skilled, business capable of developing complex resources including deep-water oil and gas fields. On the other, a honey pot around which the flies gather. On the one hand a success story that is now producing 2.8m barrels (bbl) a day of oil and gas (more than all but two of the international majors). On the other, a company that has debts of more than $120bn and is now unable to borrow more, forcing the postponement of projects on which its partners had depended.
At the beginning of July, the company put back the prospective start-up dates for the huge, 3bn bbl-plus barrel discovery in Block BM Seal 11 off the Brazilian state of Sergipe. That is no way to secure the continued confidence of partners such as the Indian state company ONGC which needs the oil.
Petrobras is not the only victim of the collapse in economic confidence. The latest round of solar licensing has been postponed, running the risk that the local supply chain will be destroyed. The wind business is in a state of frozen crisis. In recent years the growth of wind power has been a great success story; last year, 2.75GW of new wind capacity was installed. So far this year not a single new project has been approved. There is no demand, no money and no credit.
Across the energy sector, the ambitious plans set out so hopefully only 18 months ago in the International Energy Agency outlook report on Brazil are on hold.
Petrobras is at the heart of everything precisely because it has been successful. That has attracted every form of corruption, much of it now under investigation. Delma Roussef, who at one point chaired Petrobras, has been impeached and removed from presidential office. Forty politicians and dozens of corporate officials are facing charges and last week Eduardo Cunha, the speaker of the lower house of the parliament, was forced to step down. The trials have not started yet and it seems there is far more trouble to come.
One can only feel sorry for Pedro Parente, appointed by acting President Michel Temer to run Petrobras. His inheritance is broken and his power is limited. To start to balance the books and to reduce the burden of debt he is trying to sell a bundle of non-strategic assets, but it is not clear if there are any serious buyers. Petrobras is retiring 12,000 staff. Mr Parente has promised a full-scale strategy review and a new plan by the end of October. But he does not have the political power to take the steps necessary to break the company away from government, and to end Petrobras’s legislated privilege of investing in every new prospect. It is not yet clear if he will even be able to set the prices of the fuel the company sells to Brazilians.
Private company or not (and Petrobras does have a set of long-suffering private shareholders who have seen the value of their shares halved in the last two years), the business is effectively nationalised. It is no surprise that the company is the prime target of a desparate appeal from the sports minister, Leonardo Picciani, for more sponsorship from state companies to fund the Olympic opening ceremony, which will cost some $72m.
It seems that things will have to get worse — for Petrobras and for the whole country — before the necessary radical change can begin. In the meantime, international companies investing in what should be a thriving energy sector have to be aware of the reputational as well as the commercial risks of involvement in a country that is rapidly becoming the world’s largest failed state.
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