Petrobas scandal scrambles Brazil’s offshore dreams

RIO DE JANEIRO — Oil was to have been Brazil’s “passport to the future,” but the grand dreams tied to state company Petrobras have been brought to a screeching halt not only by falling crude prices, but by a crisis of its own making.

An expanding investigation into a kickback scandal at Brazil’s largest company is rippling through the industry, suspending contracts, cutting off credit supplies and forcing layoffs at shipyards and other firms that had been gearing up for the anticipated oil boom.

Not long ago, President Dilma Rousseff had promised that exploration of rich, offshore fields would create hundreds of thousands of jobs and provide royalty income to finally improve Brazil’s schools and health care system. But with no end to the investigation in sight, it’s anyone’s guess as to when Brazil will reap the rewards of its oil wealth.

“In 2008, everyone thought Brazil was becoming an oil superpower,” said Adriano Pires, an energy consultant and former official at the government National Petroleum Agency. “Those big plans of expansion are all being reviewed.”

Federal investigators say that over the last decade, construction firms paid about $800 million in bribes and other funds by overvaluing contracts with Petrobras and funneling some of the money to the ruling Workers’ Party and its affiliates.

Eighty-seven people have been charged so far, including two former Petrobras directors. And on Friday night, the Supreme Court gave the attorney general permission to expand the investigation to dozens of politicians, including a former president and the heads of both houses of congress.

“It cast suspicion on all of Petrobras’ contracts,” said Claudio Pinho, a lawyer who specializes in the oil and gas industry. “It’s paralyzing the whole operation of the biggest companies, which, in practice, halts all of the projects Petrobras needs to develop now.”

The woes at Petrobras are contributing to a wider crisis hitting Brazil’s economy, which observers say likely entered recession in 2014 and is forecast to shrink further this year.

Some analysts also fear Brazil’s sovereign debt could lose its coveted investment-grade status, as the investigation spreads across vital industries and ensnares powerful politicians. That already is contributing to gridlock in congress, making it virtually impossible to pass economic reforms and austerity measures needed to stabilize Brazil’s accounts.

Credit-rating agency Moody’s Investors Service downgraded the company to junk status in February citing an “increasing concern about corruption investigations” and it’s feared other rating agencies soon will do the same.

That essentially locks the company out of international credit markets, cutting off the investment money it needs to develop the offshore oil basins.

The problems at Petrobras, which controls 90 percent of an oil industry that employs 400,000 people, are creating a domino effect.

Suppliers under investigation are barred from signing any new deals with Petrobras. The limitation is especially crippling because, by law and depending on the project, the oil industry must use local suppliers for up to 65 percent of the equipment and services needed for its projects.

“None of those guys can go to the market and raise any money,” said Evan Sponagle, a Rio de Janeiro-based consultant. “And obviously you need the supply chain in place or else how are you going to drill?”