The Rise And Fall Of Petrobras – Analysis


Petrobras, which rose to become the fourth largest company in the world, is now battling a serious corruption scandal that has left its reputation in tatters. How did this global oil major scale such heights spectacularly and and then fall so low? There are lessons in this for India’s public sector oil companies.

By R. Viswanathan*

India’s minister for petroleum Dharmendra Pradhan’s visits to Mexico and Colombia in May were a major part of India’s ongoing strategy to diversify its energy import basket. Not on the itinerary however was Brazil, which is home to one of the world’s largest public sector energy companies.

Petróleo Brasileiro S.A. (Petrobras), the Brazilian national oil company, is at the centre of a major corruption scandal which has been unfolding since March 2014 and sparked widespread protests across Brazil earlier this year. Prosecutors found that bribes of $800 million[1] had been taken by Petrobras executives, private contractors and politicians. The assets and contracts of the firm were inflated and auditors had initially refused to certify its balance sheet in the absence of quantification of the losses caused by the scam.

This marks a considerable fall from grace for Petrobras, which just four years ago launched a $72.8 billion[2] IPO, the largest by any company in the world—and went on to become the fourth-largest global corporation[3], with a market cap of $214 billion[4].

The rise

Petrobras’ transformation from a firm founded as a government undertaking in 1953 that lacked any meaningful oil reserves or expertise, to one that was considered a model for national oil companies globally, was indeed remarkable. In the company’s favour, was a monopoly in the national hydrocarbons sector, which Brasilia opened up in 1997 to the private sector—during the heyday of the Washington Consensus—when neo-liberal policies were viewed with favour. [5]

The company invested in research, and developed deep sea technology, working with local suppliers in much the same way as Brazilian aircraft manufacturer Embraer did. Nationalistic spirit and determination was high. Investments led to discoveries of large off-shore pre-salt reserves.

By 2008, Petrobras had arrived.

It was listed among the top 50[6] companies in the world for its high transparency levels, according to Transparency International. And by 2011, the company had become a giant, producing over 2.5 million barrels per day of oil a day[7], working its way to making Brazil self-sufficient in crude oil. Boasting assets in 17[8] countries across Africa, Latin America and the U.S., Petrobras possessed cutting-edge expertise in deep-sea drilling and production.

But the oil giant was not done yet. It sought to enhance its management and financial information systems by incorporating best practices and technology from the developed countries. So the company decided to make its international debut, through a public listing on the New York Stock Exchange (NYSE). Petrobras kept the controlling 64% shareholding[9], and the rest were sold to foreign investors. All of Brazil cheered when CEO José Sergio Gabrielli rang the bell at the Sao Paulo exchange on September 23, 2010[10], and Petrobras’ shares began to trade simultaneously on the NYSE.

Thus refurbished, Petrobras embarked on an ambitious investment plan—the largest ever corporate investment plan at the time—of $220.6 billion during 2014-18[11]. Its bonds were the benchmark for other Brazilian companies. The Índice Bovespa (Íbovespa), the key stock index, rose and fell with Petrobras’ stock. The company was also the country’s largest patron of cultural and sports institutions, and events, and conservation efforts. Petrobras became the crown jewel of Brazilian industry and its rise was seen by Brazilians and the world as emblematic of the emergence of a New Brazil.

So, what went wrong?

The fall

A massive decade-long corruption scandal was uncovered in early 2014 by Brazilian police investigating a money launderer, linked to Swiss accounts, politicians and Petrobras. Since then, over 30 Petrobras executives and the company’s contractors have been indicted by the courts, and investigations by police and prosecutors have been initiated against 54 politicians[12] and 24 top private building and engineering firms. A senior Petrobras executive Pedro Barusco—who stole and kept money in Swiss accounts—turned approver, and agreed to return around $100 million from his Swiss bank accounts[13].

Unlike Delhi’s bafflingly slow investigation into money laundered by Indians and kept in Swiss accounts, the Brazilian authorities acted fast. They approached the Swiss government which collaborated quickly and froze suspect accounts. The banks promptly returned the money, and $57 million has already been received by Brazilian courts[14]. Meanwhile, some U.S. law firms have filed class action suits on behalf of minority share holders like Wall Street firms and other investors, and the U.S. Security and Exchange Commission has begun an investigation of its own.

In February 2015, Maria das Graças Foster—appointed Petrobras CEO by President Dilma Rousseff­—along with five directors, were forced to resign. The state-run Banco do Brasil’s former CEO Aledemir Bendine, who is perceived to be close to the government, succeeded Graças Foster.

The fallout of the scandal and declining oil prices is that Petrobras’ stock in March 2015 was down by nearly 70% over four and a half years[15]. The day Jose Gabrielli rang the bell at the Sao Paulo exchange was a distant memory. In the meantime, the company has lost its investment grade rating, and raising finance from the global market to service its massive debt that now stands at $170 billion[16] will be difficult and expensive.

The construction and engineering firms working with Petrobras that are also involved in the scandal, face a credit squeeze and financial problems. This means that the company’s ongoing exploration and production projects mainly in Brazil’s deep seas will be delayed. So too will the country’s own infrastructure projects like roads, dams and airports that were being undertaken by the same contractors that worked with Petrobras, now hit by the corruption scandal and the credit freeze by banks.

The domino effect of the scandal is touching every aspect of Brazilian life, from political uncertainty to economic recession, water and power shortages. The fall of Petrobras is seen as the fall of Brazil itself. From its go-go growth years of 2003 to 2010 when the country looked as though it had arrived on the global stage, Brazil is beginning to resemble a lesson in overreach.

The factors for the fall

The decline of Petrobras is closely woven into the way Brazilian politics, economics and society function.

The first major factor was corruption—a national disease that Petrobras could not escape. While in the past the company was relatively clean, the multibillion dollar contracts brought out the company executives’ avaricious side.

Secondly, the company became too big and diverse for control. It expanded beyond its core competencies—deep sea prospecting and drilling—and ventured into petrochemicals, fertilisers, biofuels, electricity and wind energy. This massive and diverse structure was exploited by crooked executives who took cuts in contracts and inflated deal prices.

Third, hubris began to set in with the successful discovery of large pre-salt fields and the world’s largest initial public offering that raised around $70 billion in 2010. Swept up in the euphoria, top management and the government neglected to check the books of the company which contained the inflated contracts.

Fourth, the government has caused considerable loss to the company by forcing it to sell petrol at prices far below market prices. Like India, Brazil subsidises retail petrol sales, so the loss to Petrobras has been massive.

The final factor was the incompetence of the CEO, board and auditors who failed to detect, and take action against corrupt practices. Even if they were aware of such practices, it is possible that they did not take action because Petrobras executives had become too powerful and had deep political connections.

The future

Despite these overwhelming problems, Petrobras can recover – for a variety of reasons, both technical and political.

First, it is still one of the largest oil producers in the world with ample reserves—over 16 billion barrels per day (bpd)[17]–and the ability to double production from 2.5 to 5 million bpd[18] in the next decade. This can be done by continuing its investment in technology and production.

Second, Petrobras is a research and innovation-driven company. It earmarks 1% of its $130 billion in revenue (2013)[19] for R&D, outspending Exxon. Petrobras holds the world record in deep-sea production—5,000 metres[20] below the sea—and in addition to in-house development technology, it has obtained numerous patents through smart collaboration with suppliers and subcontractors on technology.

Third, it really is too big to fail. Petrobras is the country’s largest tax payer and the corporate contributor to GDP—6.3% in 2013[21]. Rousseff simply cannot afford to let Petrobras fail.

The company can exit from its loss-making operations and sell some assets such as a few refineries and retail outlets, to recoup finances. The full financial recovery of the company of course depends on oil prices firming up. At prevailing rates, recovery will take longer. And Rousseff must persevere in quickly drilling out the corruption and institutionalising procedures to prevent such a scandal again. Institutionalising a more transparent system with adequate checks and balances will be key.

Lessons for Indian oil companies

The impact of the Petrobras scandal is unlikely to be adverse for the investment by Indian companies like ONGC Videsh which are part of a consortium with Petrobras in some Brazilian oil fields. Petrobras was established around the same time as ONGC was created in India. Despite the joint discovery of a new oil reservoir in the ultra-deepwater Sergipe-Alagoas Basin—off the east coast of Brazil—by Petrobras in a venture partly funded ONGC this month, the Brazilian giant has moved way ahead of its Indian counterpart. Petrobras’ relentless, aggressive and innovative search for oil through the deepest parts of the sea, helped to make Brazil self reliant in oil by 2006, and make it an exporter too.

Besides oil, Petrobras has helped in the country’s goal to reduce dependence on fossil fuel and increase the share of renewable energy. Petrol consumption has been reduced by a third since the introduction of ethanol. Petrobras enthusiastically took to ethanol, bio-diesel and other biofuels and collaborated with car companies and ethanol producers to make the pioneering ‘fuel ethanol’ programme a success. Thanks to this collaborative spirit, Brazil has cut oil consumption, contained pollution, increased the income of sugar cane farmers and strengthened the domestic sugar-alcohol industry.

In contrast, India is becoming more dependent on oil imports. ONGC has not been as aggressive and innovative an explorer as Petrobras. It is likely that India’s imports of Brazilian crude will only increase. Private sector players like Reliance will continue to export diesel to Brazil, where refining capacity is inadequate. These will likely increase since the new refinery projects of Petrobras have been hit and delayed by the corruption scandal.

Indian public sector oil marketing companies have taken the easy route of increasing imports—more imports means more consumption, and higher prices of oil mean more revenue for them. They do not align their business model to the strategic energy policy of the country, to reduce imports, increase renewable sources and cut pollution. They do not play for Team India in energy, happy to remain in their own narrow silos of earnings sinecures, minus a larger vision. New Delhi has also opted not to put much pressure on them, since middlemen and politicians can and do benefit from large imports. As a result, there has been very little investment in research or technology, and even less interest in building an ecosystem of research, as Petrobras did, supporting universities and local innovators.

For the ‘Make in India’ campaign to be truly successful, investment in a research ecosystem is Petrobras’ real lesson for India.

*Ambassador Viswanathan is Distinguished Fellow, Latin America Studies, Gateway House. He is the former Indian Ambassador to Argentina, Uruguay, Paraguay and Venezuela, and Consul General in Sao Paulo. This article was published by Gateway House: Indian Council on Global Relations.



[i] Daily Herald, Brazil marchers hit streets to support Petrobras, president, Lehman Stan, March 2015, <>

[ii] Bloomberg News, Petrobras Raises $70 Billion as Investors See Growth, Millard Peter, September 2010, <>

[iii] International Political Economy Series, The Political Economy of an Emerging Global Power: In Search of the Brazil Dream, Casanova Lourdes, Julian Kassum, June 2014, p.50, <>

[iv] Ibid

[v] Petrobras, Our History, <>

[vi] Transparency International, Shining a light on the world’s biggest companies, July 2012, <>

[vii] Petrobras, Sustainability Report, 2010, p.10, <>

[viii] Petrobras, Sustainability Report, 2010, p.48, <>

[ix] Routledge, Routledge Handbook of Latin America in the World, Dominguez I Jorge, Ana Covarrubias, January 2014, p.437, <>

[x] BM&FBOVESPA, BM&FBOVESPA celebrates with Petrobras the largest share offering in history; exchange announces second place in global market capitalization ranking, September 2010, <>

[xi] Petrobras, 2030 Strategic Plan and 2014-2018 Business Plan, February 2014, p.44, <>

[xii] Forbes, Brazil’s Two Most Powerful Politicians Saved From Huge Oil Scandal, Rapoza Kenneth, March 2015, <>

[xiii] Wall Street Journal, Former Petrobras Executive Paying Back Millions in Graft Funds, Kiernan Paul, March 2015, <>

[xiv] Ibid

[xv] CNN Money, Petroleo Brasileiro Petrobras SA, <>

[xvi] Forbes, Petrobras’ Debt Burden Getting Costlier,Rapoza Kenneth, March 2015, <>

[xvii] Petrobras Magazine, Deep Future, Edition 64, <>

[xviii] Petrobras, 2030 Strategic Plan and 2014-2018 Business Plan, February 2014, p.14, <>

[xix] Shareholders’ Foundation, Petroleo Brasileiro Petrobras SA (ADS) (NYSE: PBR) Investor Securities Class Action Lawsuit, August 2014, <>

[xx] Global CCS Institute, Petrobras Lula Oilfield CCS Project, July 2014, <>

[xxi] Financial Times, Counting the cost of the Petrobras Scandal, February 2015, <>

Gateway House

Gateway House: Indian Council on Global Relations is a foreign policy think-tank established in 2009, to engage India’s leading corporations and individuals in debate and scholarship on India’s foreign policy and its role in global affairs. Gateway House’s studies programme will be at the heart of the institute’s scholarship, with original research by global and local scholars in Geo-economics, Geopolitics, Foreign Policy analysis, Bilateral relations, Democracy and nation-building, National security, ethnic conflict and terrorism, Science, technology and innovation, and Energy and Environment.

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