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Petrobas Scandal

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By Elizabeth Onuoha

A Preliminary Study on the Petrobras Scandal

Executive Summary

Petrobras is a semi-pubic Brazilian multinational energy corporation with headquarters in Rio de Janerio, Brazil. The Company was founded in 1953, a monopolist in the oil and gas sector at the time. Although it ceased to be Brazil’s legal monopolist in 1997, it maintained its status as a significant oil producer with an output of more than 2 million barrels (320,000 m3) of oil equivalent per day, owning an oil refinery, tankers and conserving its reputation as a major distributor of oil products.

In 2013, there was a decline in the Company’s domestic crude oil production which was as a result of scheduled downtime – ongoing maintenance at aging offshore platforms as Petrobras tried to reverse natural decline at mature oil fields, leading to a production of 1.93 million barrels per day of crude in 2013, down 2.5% from 2012 which according to the company was less than the company’s target of 2.02 million barrels a day.

A lot of factors can be said to have attributed to the reduction in Brazil’s crude oil output- maintenance, redesigning of underwater layouts, installation of new floating systems etc. regardless of the constraints, the company claims to have established the necessary conditions to increase production in 2014.

Scandal

Lack of good governance drove one of the world’s largest oil businesses to becoming one of the worlds most indebted oil company causing the company to lose its market value in three years.

Irrespective of Petrobras claim to have laid down plans to ensure increased production and efficiency in the coming year – 2014, the company’s actions and operations proved otherwise. Investigations were launched on the company, when a former executive Paulo Roberto Costa, alleged that one of its departments paid millions of dollars in bribes to politicians. He also alleged that the refinery division of the company operated a fund that diverted monies to political parties accusing over forty (40) politicians of involvement in a kickback scheme.

Mr. Costa, who was head of downstream operations for Petrobras from the year 2004 to 2012, claimed that the bribes received by the government officials (politicians) as at when he served was a 3% commission on the values of contracts signed with Petrobras.  It is important to note that Mr. Costa was arrested and many of the politicians mentioned have denied involvement.

By the third quarter of 2014 (25 Nov), the Petrobras Board of Directors approved the appointment of a director of Governance, Risk Management and Compliance charged with ensuring process compliance and risk mitigation, including the risk of fraud and corruption, thus, guaranteeing compliance with laws, norms, standards and regulations, including the rules of the Comissao de Valores Mobiliarious (CVM – Brazilian Securities and Exchange Commission) as well as the U.S. Securities and Exchange Commission.

Prosecutors were given a go-ahead by the Brazil Supreme court in the investigation of fifty-four (54) alleged corrupt leaders which found that at least $800m in bribes and other funds paid big construction and engineering firms in return for inflated contracts with the state energy company – Petrobras. Regardless of the foregoing, experts posit that the investigation and possible trials will take years to play out.

The pillar of Brazil’s Economy

Having understudied the trend of events that unfolded as a result of lack of good governance and controls in Petrobras, findings of this report includes and is not limited to;

  • The reputation of one of the largest oil businesses in the world Petrobras procuring for itself a damaged repute. The company will need to reassure the business world of its renewed integrity stance if ever, by;
  • Firstly, weeding out all executives and non-executives that participated in the scandal
  • Secondly, the company will need to disclose all of its assets and their values ensuring transparency to enable its stakeholders account for their shares
  • Thirdly, the company will need to declare a public statement addressing the entire State of its illegal activities
  • Fourthly, the appointed governance and compliance director will need to review the company’s governance and competency framework, developing policies, process and procedure to lock-jaw internal and external controls which also includes parameters on third part relationship.
  • The government desperately needs fiscal and political reform measures – Due to perceived bad leadership and lack of transparency, the company will suffer a major setback that will definitely have a ripple effect on the economy as investors will slugger to do business with the company and/ or government
  • The issue of corruption is indebt considering the level of persons involved in the scandal, notably senior management and government personnel’s whom are influential to the operations of the state as well as the Company – Senator President Renan Calherios, President of the Chamber of Deputies Eduardo Cunga Former Energy Minister Edisaon Lobao and former President Fernando Collor de Mello etc. It is important that these officials as well as businesses found guilty of this alleged bribe and corruption be brought to justice in other to ensure and encourage voluntary compliance

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