Opinion: The Curmudgeon on Petrobras

Opinion, by Michael Royster

RIO DE JANEIRO, BRAZIL – “O Petróleo é Nosso!” (“It’s Our Oil!”) was the joyful cry of Brazilian nationalists in the early 1950s; the government had created a monopoly in all things oily and gassy which would last for over forty years. In 1995, when the Plano Real(ity) visionaries decided to allow others inside Brazil’s playpen, street demonstrators carried signs saying “Defenda o Monopólio!”

Petrobras (the monopolist in question), prospered, as do all operations that are the only game in town. Year in, year out, there were rumors of bribes paid in order to get contracts, officers and directors (all political appointments) came and went, but nothing was ever proven.

The rumor mill, however, has just cranked up its engines over two refineries, one in the U.S. and one in the Brazilian Northeast. Both involve huge cost overruns, yet both are symptomatic of a more deep-seated problem, which can be summed up as “politics trumps economics”. Petrobras has always been run as a political entity, rather than an economic one.

In 2006 Petrobras bought a fifty percent interest in a Texas refinery, for a not unreasonable sum, but then was caught out by a contractual “put option” exercised by the Belgians who had bought the other fifty percent. Arbitration resulted in Petrobras shelling out more than three times the original purchase price — a total of US$1.2 billion.

Where are the politics in this? President Dilma, then Lula’s Chief of Staff, was the Chair of the Board that approved the purchase and the contract. When this news came out, she refused to take the blame, passing the buck and claiming she had been misled by a “faulty” report prepared by Petrobras. Independent analysts have indicated there was nothing faulty about it.

Needless to say, the Petrobras Director who was in charge of the purchase has just been removed. His appointment had been purely political, and his two sponsors were and are prominent members of Congress. Both now claim the other guy sponsored him, perhaps because he’s also now being investigated for corruption. He denies all allegations.

In case you’re wondering, the refinery is now running 24 hours a day. It is fair to say that if refineries made a profit, the billion dollars Petrobras spent would be insignificant. But they don’t, so it isn’t. What makes it seem insignificant is the “Abreu e Lima” refinery in Pernambuco.

This project was an entirely political creation, a “you-scratch-my-back-I’ll-scratch-yours” deal done in 2008 between then-President Lula and then-President Chávez. Neither Petrobras nor PDVSA, the Venezuelan oil monopoly, wanted anything to do with it, as both knew two things: (a) refineries don’t produce much profit; and (b) joint venture refineries with competitors won’t work when both have competing interests.

The initial budget for constructing the refinery was some US$2.5 billion, of which Petrobras was supposed to contribute sixty percent, just slightly more than the Texas refinery cost. For whatever reason PDVSA’s share was never paid. Therefore, Petrobras did all the work alone — but, lo and behold, the budget, under Petrobras leadership, rose to an astonishing US$20 billion! Moreover, it still isn’t producing anything except headlines.

Congress is about to institute a formal inquiry, so Petrobras will, sooner or later, have to offer an explanation for the eight-fold increase in costs, which happened in a mere six years. The Curmudgeon, an incorrigible optimist, sincerely hopes that criminal mismanagement will not be part of the explanation.

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Michael Royster, aka THE CURMUDGEON first saw Rio forty-plus years ago, fetched up on these shores exactly 36 years ago, still loves it, notwithstanding being a charter member of the most persecuted minority in (North) America today, the WASPs (google it!)(get over it!)