Petrobras spending on Pasadena refinery snares Brazil finance minister in scandal

By Rodrigo Orihuela, Juan Pablo Spinetto and Raymond Colitt
Bloomberg News

Brazil’s top finance official is being roped into a growing scandal over Petroleo Brasileiro SA’s $1.19 billion purchase of a Texas plant, the latest in a string of troubles plaguing the company’s money-losing refining unit.

Finance Minister and Petrobras Chairman Guido Mantega is being called upon to testify before a lower-house commission on the 2006 purchase of the Pasadena refinery from Astra Oil Trading NV, which bought the plant a year before for $42.5 million. President Dilma Rousseff, then Petrobras’ chairwoman, said directors approved the $370 million purchase of a 50 percent stake without knowledge of a clause that later forced it to buy the rest as part of a $820.5 million legal settlement.

The outcry over the acquisition is shining the spotlight on Petrobras’s runaway refining investments and project delays that contributed to 17.7 billion reais ($7.7 billion) in losses for the unit last year. At $32 billion, the price tag for the state- run company’s two main refinery projects is almost three times investments in the soccer World Cup, which triggered violent protests across Brazil last year.

“The company is saddled at the top with a decision process that is very accident prone,” Chris Palmer, a portfolio manager at Henderson Global Investors Ltd. who oversees about $2.5 billion in assets, including Petrobras shares, said by telephone from London. “What I care about isn’t the quality of the transparency. It’s the quality of the decisions.”

The request yesterday for Mantega to testify followed summons from a Senate committee to Chief Executive Officer Maria das Gracas Foster and Energy Minister Edison Lobao earlier this week.

The Finance Ministry declined to comment on the Pasadena transaction. The presidential palace referred questions to Rousseff’s March 19 statement on the refinery purchase, declining to comment on the political impact of the case. Lobao’s office said he has so far agreed to similar requests to testify in Congress and referred further questions to Petrobras.

The state-run company, which is collaborating with government agencies in the matter, created its own committee to investigate the purchase and has 45 days to deliver findings to the board, Petrobras said in an e-mailed response to questions.

The scandal has been heating up since March 19 when Estado de S. Paulo newspaper published minutes of the 2006 meeting in which the Rousseff-led board approved the purchase from Astra.

Petrobras’s former head of refining Paulo Roberto Costa was arrested March 20 for allegedly taking part in a money- laundering scheme and accepting bribes related to the Abreu e Lima refinery project between 2011 and 2013. The next day, subsidiary BR Distribuidora fired its CEO, Nestor Cervero, who according to local media oversaw the report presented to the board to approve the deal. The regulatory filing announcing Cervero’s dismissal made no mention of the Pasadena refinery.
Costa, who is in prison, couldn’t be contacted on his mobile phone. Cervero didn’t respond to a message left on his home phone.

The Pasadena scandal is the latest in a series of incidents showcasing mismanagement and political meddling in Petrobras, particularly in the so-called downstream sector, said Jose Mendonca Filho, leader of the opposition DEM party in the lower house, who pushed the financial control committee to call Mantega along with Cervero to testify. He cited fuel-price caps that eroded Petrobras’s profitability and depressed its shares, as well as political pressure to build the Abreu e Lima refinery with Petroleos de Venezuela SA, which later dropped out.

“The company’s been used for political purposes,” Mendonca Filho said in a telephone interview from Brasilia. “The result has been corruption scandals and poor management because they put unqualified people in charge.”

The scandal, while bad news for Rousseff as she prepares to run for re-election in October, may turn out to be good for investors seeking better transparency and efficiency, said Rogerio Freitas, a partner at Teorica Investimentos.

Petrobras, whose financial woes wiped out 227 billion reais in shareholder value since March 2011, posted its best six-day rally in five years before yesterday. The shares are up 17 percent since the Estado report and rose 5.4 percent to 15.18 reais at 1:03 p.m. in Sao Paulo, heading to the highest close since Jan. 23.

“The more the company is scrutinized the better,” said Freitas, who helps manage about $100 million including Petrobras shares at the Rio de Janeiro-based hedge fund. “This attention ends up being positive. The company became an instrument of public policy. If that stops and turns instead into a normal company, that will be very good.”

Rousseff’s approval rating fell to 51 percent in March, from 56 in December, an Ibope poll published by the National Industry Confederation showed today. It was the first drop since a July record low.

Gracas Foster told O Globo in an interview that the Rio- based oil producer won’t be subjecting Abreu e Lima to an internal audit.

Abreu e Lima, located in the northeastern state of Pernambuco, is set to refine 230,000 barrels a day when it opens in the fourth quarter, almost three years behind schedule. Its $18.5 billion price tag compares with an original budget of $2.5 billion. The 150,000-barrel-a-day Comperj refinery is set to cost $13.5 billion by the time it opens in 2016, four year later and 61 percent more costly than originally planned.

While Petrobras expanded refining output by about 15 percent last year by improving efficiency at its current plants in the past two years, it hasn’t added new capacity since the 1980s. That’s forcing the company to import gasoline and diesel to meet domestic demand, which it buys at international prices and sells below cost at government-set prices.

Petrobras’s oil exploration and production division “actually stacks up pretty well on an international basis,” said Nick Robinson, a portfolio manager at Aberdeen Asset Management Plc, which manages about $15 billion of Latin American shares, including Petrobras. Concern stems from the refining “and the amount of money that has gone to that segment,” he said.