PETROBRAS used to wow the oil world with its expertise at tapping the black stuff thousands of metres beneath the ocean floor. Now Brazil’s oil behemoth is better known for plumbing an altogether different kind of depth: mired in a multi-billion-dollar bribery scandal, indebted to the hilt and worth a third of the 405 billion reais ($244 billion at the time) it was valued at shortly after its inital public offering in 2010. On February 3rd, Brazil’s president, Dilma Rousseff, whose government holds a controlling stake in the company, at last succumbed to pressure and decided to replace its beleaguered boss, Maria das Graças Foster.
Investors rejoiced: Petrobras’s shares, which sank by 20% last week, rebounded by 10% almost striaght away. Yet most of Petrobras’s woes are not Ms Foster’s fault. The government makes most of the strategic decisions at the firm. These included requiring the company to hire and buy parts from the inefficient local oil-services sector, which has led to delays and mammoth cost overruns; building expensive refineries in the poor north-east in the name of regional development; and being the only principal operator in vast, ultra-deep pré-sal (beneath the salt) fields discovered in 2006 off Brazil’s coast.
Worst of all, since 2006 the government has capped petrol prices to curb inflation. Unable to meet rising domestic demand with what it produces, Petrobras has had to import petrol and diesel, selling it at a loss. In 2011-13 this cost it an estimated 48 billion reais ($21 billion). Ms Rousseff’s finance minister is reportedly busy seeking a replacement for Ms Foster. Her succesor will face a sea of challenges. With oil prices now around $50 a barrel, much of the pré-sal oil barely makes money. Despite debt-fuelled investment of $40 billion a year, production has flatlined at around 2m barrels a day (b/d) for the past four years and is set to nudge up by just 4.5% in 2015. Last year’s stated goal of doubling production to 4.2m b/d by 2020 looks fanciful, especially with the otherwise sensible decison to cut investment by between $7 billion and $9 billion, announced last week.
Then there is the kraken of corruption. It first reared its head last March, when the federal police arrested Paulo Roberto Costa, who ran the company’s refining arm from 2004 to 2012, on charges of money-laundering. In plea-bargain testimony Mr Costa confessed to funnelling 3% of the value of contracts signed with his division to slush funds for politicians. The public prosecutor’s office has identified at least 2.1 billion reais in suspicious payments. Aggrieved foreign investors have filed several lawsuits against the company in New York, where some of its shares are traded.
Petrobras too has been trying to work out the cost of inflated contracts. It was expected to take a bribery-related write-down in its third-quarter earnings—originally due in November but postponed twice to give it time to come up with a figure. Instead, it came up with two, neither of which Ms Foster was happy with. Applying Mr Costa’s 3% cut to the dodgy deals gives 4 billion reais. Marking the iffy assets to market suggests they are now worth a whopping 89 billion reais less than their book value. Some others look undervalued by 26 billion reais but Brazilian law only allows assets to be written down, and not marked up.
The lower estimate probably understates the problem, which may extend beyond Mr Costa’s former fief; the higher sum, equivalent to 15% of Petrobras’s assets, almost certainly exaggerates it, since valuing each facility independently of others fails to account for economies of scale. And part of the impairment will have been down to mismanagement, not graft.
Without a credible write-down, the company’s auditor, PwC, refused to sign off on the report (how it missed the overvalued assets in previous years is a puzzle). Last week Petrobras published it anyway, as it had to do before March to avoid triggering a technical default. Should it fail to release an audited full-year statement by July, however, creditors may demand immediate repayment of up to $54 billion. Given how tricky pinning the number down has proved, this cannot be ruled out. With just $25 billion in the kitty, $16 billion-18 billion in debt and divident payments due this year and limited access to new financing for lack of audited books, meeting those obligations might require a government bail-out.
Tackling these troubles will require extreme talent. Yet the most important task for Petrobras’s new boss is to resist interference from the state. Government interference has made it the least profitable big oil firm in the world, according to a report published last year by Credit Suisse. But the bank also found that where meddling is minimal, such as in finding oil and getting it out of the ground, Petrobras is almost the best. Hopefully, Ms Rousseff has finally cottoned on to this, too.