PETROBRAS CASE THREATENS BRAZIL´S BOOM / THE FINANCIAL TIMES

Petrobras case threatens Brazil’s boom

By Dom Phillips in São Paulo

Published: July 21 2009 22:44

It may be the worst crisis in Petrobras’s history, says the company’s president, and it comes as Brazil’s state-owned oil group is ratcheting up development of the country’s potentially vast deep-water oilfields.

Last week, members were selected for a Brazilian parliamentary investigation committee (CPI) into allegations of fraud, corruption, over-invoicing and tax avoidance by the company.

The inquiry, which begins hearings next month, risks complicating the Brazilian government’s efforts to set eagerly awaited new regulations to cover some of the world’s few big, unexploited oil reserves, which some analysts say place Brazil on the cusp of a new oil boom.

The allegations against Petrobras and the ANP – the government regulatory body for petroleum and gas – include fraud in bidding to repair oil exploration rigs, serious contract irregularities in construction, over-invoicing in building the Abreu e Lima refinery in Pernambuco, diversion of royalties, a disputed tax bill of R$4.3bn ($2.3bn) and budget irregularities.

“Petrobras is a political apparatus of President Lula,” says Álvaro Dias, the opposition senator who has brought the inquiry. “We want to investigate, reveal the facts, and punish those responsible.”

Petrobras denies the allegations and Luiz Inácio Lula da Silva’s supporters dismiss the inquiry as politically motivated. “There are no problems with Petrobras contracts,” says Petrobras. “There is no overbilling. There are only some divergences between the technical criteria used by the company and the para­meters employed by the Federal Court of Auditors.”

In the next five years alone, Petrobras plans to invest $28.9bn in deep-water “pre-salt” fields. The in­quiry comes at a bad time.

“The company is kick-starting development of the technically complex pre-salt fields, but preparing its defence is already diverting managerial resources away from this effort,” says Gareth Chetwynd of Upstream, the specialist oil and gas magazine.

Last Tuesday, Petrobras president José Sergio Gabrielli de Azevedo wrote to the commission promising the company’s full co-operation. He also wrote to employees calling this the “biggest crisis” in Petrobras’s history.

But the inquiry itself has become embroiled in accusations of corruption dir­ected against Brazil’s senate. The decision by José Sarney, senate president and former president of Brazil, to give the committee the go-ahead has been criticised as an attempt to divert attention from the stream of corruption allegations directed against him and other senators. “Every day, the newspapers come up with some other story about him,” said David Fleischer, professor of political science at the University of Brasília. “He thinks the CPI will grab all the headlines and he will slink into the background.”

The accusations of corruption in the Brazilian senate include charges of nepotism in awarding senate jobs, stemming from 663 “secret acts” that the senate passed between 1995 and 2009. The conservative Estado São Paulo news­paper claims that 10 per cent of the acts benefited Mr Sarney’s family or allies.

Mr Sarney denies the accusations: “It’s a campaign by Estado São Paulo who have a political position against mine, which is to support President Lula who is [leading a] great government,” Mr Sarney said. The president has dubbed the CPI a political attack.

On Saturday, students demonstrated on São Paulo’s main Avenida Paulista, while motorists beeped their horns in support of banners reading “Sarney Out”. An e-mail campaign to oust him is doing the rounds. Even senators have been calling for José Sarney’s resignation. Against this heated political background, the Petrobras commission is set to begin when the senate returns from recess on August 6 and has 180 days to report.

“This is the worst challenge that Petrobras has faced,” says Professor Fleischer. “Petrobras won’t be destroyed but it might be tainted. You don’t want your image stained badly if you’re going after billions and billions of dollars to invest.”

Copyright The Financial Times Limited 2009