[Flashback] Petrobras CEO and Five Other Executives Resign


Posted by John Soh Yong Ye , Year 4 undergrad at the School of Economics, Singapore Management University

A corruption scandal at Brazil’s Petroleo Brasileiro SA has forced a management shake-up at the big state-run oil company, whose troubles are proving toxic for both President Dilma Rousseff and the nation’s economy.

Petrobras Chief Executive Maria das Graças Silva Foster, who led the company since 2012, and five other top executives have stepped down, Petrobras said in a securities filing. Ms. Foster’s departure, while sudden, nevertheless had been expected for weeks.

A 30-plus-year veteran of the company, Ms. Foster hasn’t been implicated in the scandal. Still, investors appeared to have lost confidence in her leadership as the crisis deepened.

Petrobras stock initially rallied on the news, before settling 0.2% higher on Wednesday. But the resignations raised fresh questions about the future of the company, whose stock is down nearly 60% since early September, wiping out $78 billion of value. The world’s most indebted oil major, Petrobras is so strapped for cash that Brazil’s government has indicated it will step in to pay bondholders if the state-controlled company can’t.

The company’s swoon has paralyzed critical sectors of Brazil’s economy, thrown thousands of Brazilians out of work and sparked public outrage at the alleged looting of Brazil’s most important company by some businessmen and politicians.

The fast-moving scandal could prove explosive for Ms. Rousseff’s ruling Workers’ Party when expected indictments of high-ranking politicians are handed down in coming weeks. Opposition lawmakers are pushing for a fresh congressional probe into the alleged corruption.

Some people are calling for the impeachment of Ms. Rousseff, who was chairwoman of the Petrobras board when the alleged wrongdoing took place. But that is a remote possibility at present, considering Ms. Rousseff hasn’t been implicated in the investigation.

Still, the scandal is a substantial distraction for the president, as she is battling to keep electricity and water flowing during a severe drought, trying to jump-start Brazil’s moribund economy and shore up the nation’s deteriorating finances to preserve its investment-grade credit rating.

The “challenge in restoring confidence was a daunting one to begin with but has been made even more difficult since the scandal deepened,” said Nicholas Spiro, director of sovereign risk consultancy Spiro Sovereign Strategy, based in London. “What’s particularly worrying is that the government may be forced to prop up Petrobras at a time when Brazil is already in danger of losing its investment grade status.”

Dubbed “Operation Car Wash” by investigators, the sprawling federal investigation has exposed the murky world of public contracting. Authorities allege that some of the nation’s largest construction companies paid bribes to secure $23 billion in contracts with Petrobras in recent years. Prosecutors say the companies colluded to drive up prices for the work, kicking back a portion to high-ranking Petrobras employees and politicians, including members of Ms. Rousseff’s ruling Workers’ Party.

Since the scandal exploded in March, prosecutors have charged 39 people for alleged corruption, money-laundering and organized crime, including two top former Petrobras officials and 27 construction-industry executives.

Petrobras says it is a victim of the alleged corruption and that it is cooperating with authorities. The company recently set up an internal compliance division to address the corruption issue. Workers’ Party officials have repeatedly denied involvement. Some of the companies and attorneys of the people involved have denied wrongdoing. Others have said only that they are cooperating with investigators.

The U.S. Department of Justice and U.S. Securities and Exchange Commission are also investigating Petrobras, whose shares trade in New York.

According to Wednesday’s securities filing, the Petrobras board of directors will meet this Friday to choose replacements for Ms. Foster and other departed executives.

The filing didn’t name the five executives leaving the company. Petrobras didn’t schedule a news conference to discuss the departures. It declined multiple requests for comment, as did Ms. Rousseff’s office.

Experts said the housecleaning was necessary to restore investor confidence. But finding a top-flight chief executive to take the helm of Petrobras in the midst of crisis will be difficult. Rafael Cortez, a political analyst at Tendencias Consultoria Integrada in São Paulo, said Ms. Foster’s successor will need to possess at least two characteristics that don’t always mesh: credibility in the eyes of investors and the trust of Ms. Rousseff.

An emboldened opposition, albeit still a minority in Congress, has used the Petrobras scandal as a way to turn up the heat on an administration it accuses of having stuffed the company’s management with political cronies.

Even before the resignations, opposition parties were already gearing up to create another congressional probe on the scandal. A similar probe last year didn’t yield meaningful results, largely because it was filled with government loyalists. But changes in congressional leadership this year mean that a possible new investigation is likely to include more lawmakers who aren’t so friendly toward Ms. Rousseff.

Such congressional probes could be a path to an impeachment process, if they manage to effectively link the president to any wrongdoings. But analysts say that is an unlikely outcome at this point.

“It is extremely hasty to talk about an impeachment,” said political scientist Paulo Carlos Calmon, from the University of Brasília. “You still need to have a congressional investigation and proof that the president was involved,” he said, noting that parties that make up the governing coalition are still likely to preside over the investigations.

In addition to the political headache for Ms. Rousseff, the scandal is weighing heavily on Brazil’s economy. Petrobras isn’t just Brazil’s largest company, it is the single-biggest motor of infrastructure spending, accounting for around 10% of the nation’s total capital investment annually. An aggressive expansion of its deep water oil production in recent years has generated billions in spending on drilling platforms, pipelines, refineries, transport vessels and other projects. That in turn has created hundreds of thousands of jobs for Brazilians up and down the supply chain.

But the Operation Car Wash scandal, coupled with a plunge in global oil prices, has thrown a wrench into that wealth-and-job-generating machine.

Still struggling to calculate the extent of the fraud, Petrobras has canceled planned projects and delayed payments to accused contractors, triggering a cascade of woes that is rippling through the economy.

Thousands of laborers have been put out work building oil refineries, tankers and drilling platforms. Banks that lent money to firms tangled in the legal dragnet are cutting off credit and girding for potential losses. Bankruptcies, default and credit downgrades of builders are rising.

“Petrobras could be like a Lehman Brothers for Brazil,” said Pedro Barbosa, a partner at Rio de Janeiro-based asset-management firm STK Capital. “It is a huge company. It has a lot of suppliers. There’s a lot of debt. If Petrobras really starts to have a situation where it is killing projects and saving cash, you’re going to have a lot of people who are going to go bankrupt.”

Indeed, fears are growing that the paralysis could slam the brakes not only on GDP growth, but on Brazil’s ambitions of becoming a Top-Five oil producer by 2020. Ms. Foster said last week that the firm would reduce its investment in exploration activities “to the minimum necessary.”

Despite Petrobras’ growing problems, Ms. Foster’s job had seemed secure, largely because of Ms. Rousseff’s support. Ms. Foster said last year she had tendered her resignation several times, but Ms. Rousseff wouldn’t accept it.

But in recent months, more investors, top government officials and analysts said that for the company to move beyond the embarrassment of the scandal, the senior management of the company should step down. “Political influence at the company has to end because if it doesn’t, then, it will be the end of Petrobras,” said Luís Octavio da Motta Veiga, former Petrobras president.

Ms. Foster, 61, was appointed chief executive in 2012 after starting at the company as a college intern some 30 years earlier. She took the helm of an iconic Brazilian company that is widely respected for its expertise in deep water oil exploration and one in the midst of a global oil boom. But just a year later, her tenure became overshadowed by the scandal.

Ms. Foster grew up poor in a Rio de Janeiro favela, or slum, and recycled cans as a child to pay for her education. When she took over as chief executive, industry observers were originally encouraged. A chemical engineer by training, Ms. Foster is widely respected for her technical knowledge in the oil industry.

But while output has increased on Ms. Foster’s watch, the corruption scandal came to dominate headlines and eventually began to weigh on the company’s earnings. Last week the company reported its twice-delayed third quarter earnings, but failed to include an expected write-down of assets tied to the scandal. That sent shares tumbling, and raised fresh questions about management’s ability to steer its way through the scandal.


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