Petrobras Probe Starts as Gabrielli Struggles With ‘Big Crisis’

By Helder Marinho and Alexander Ragir

Aug. 6 (Bloomberg) -- Petroleo Brasileiro SA, struggling to meet output targets and finance a $174 billion spending plan, faces a new challenge today as Brazil’s Senate probes claims it evaded taxes and funneled cash to government allies.

The investigation, prompted by opponents of Brazilian President Luiz Inacio Lula da Silva, focuses on allegations Rio de Janeiro-based Petrobras evaded 4.4 billion reais ($2.4 billion) of taxes, overpaid for goods and may have favored the president’s supporters when it made charitable donations. Chief Executive Officer Jose Sergio Gabrielli denies the claims.

Petrobras rose 42 percent this year in Sao Paulo, compared with a 12 percent decline for larger competitor Exxon Mobil Corp., after the discovery of the biggest oil find in the Americas since 1976 prompted investors to bet profits would surge. The probe is another challenge for the company which risks missing this year’s output goals and in June had its debt rating cut to the lowest investment grade by Standard & Poor’s.

“It is going to be a big crisis,” Gabrielli, 60, who’s spent 40 percent of his work week in the capital of Brasilia since June to prepare for the inquiry, said in an interview at his Rio de Janeiro offices on Aug. 3. “You don’t know how it is going to be, the trickling down impact of the gossip.”

An 11-member Senate committee, led by a member of Lula da Silva’s Workers’ Party, is investigating the allegations. Gabrielli told Petrobras’s 74,000 employees in a July 14 letter that the company fired three employees after an internal investigation, and cooperation with the prosecutor’s office and federal police, into the bidding process for oil platforms.

Senate Inquiry

The inquiry may show Petrobras mismanaged its budget and hurt profitability, according to Regis Abreu, who oversees $1 billion as executive director of Mercatto Gestao de Recursos in Rio. Petrobras, the world’s ninth-largest company by market value, is under scrutiny as Gabrielli seeks to finance a $174 billion five-year plan and persuade the government the company should play a bigger role in developing offshore oil fields.

Gabrielli, who denied the claims in a July 14 statement, assigned 40 employees to the probe, started a blog called “Facts and Data” and hired a public relations firm. Senator Sergio Guerra, president of the opposition Social Democratic Party and a member of the investigative committee, said he hopes the panel ends with “the punishment of some people.”

“For Petrobras, it’s a big deal,” said Abreu, whose funds don’t hold the company’s shares or are shorting the stock. The probe “will probably show that there’s a lack of control and disorganization,” he said. “Petrobras is a company that is very big, very important and hardly profitable even though it’s in a sector that has churned record profits in recent years.”

Profit Drops

Petrobras consolidated net income in the first quarter fell 20 percent to 5.82 billion reais ($3.21 billion), or 66 centavos a share, from 7.24 billion reais, or 83 centavos, a year earlier, the company said May 11. Exxon’s profit fell 58 percent to $4.55 billion, while London-based BP Plc’s net income for the three months slid 64 percent to $2.56 billion.

Petrobras, founded in 1953 under President Getulio Vargas, discovered the Tupi field, with estimated reserves of as much as 8 billion barrels of oil, two years ago. The find is the largest oil discovery in the Western Hemisphere since that of Mexico’s Cantarell more than three decades ago.

The finds have helped make Petrobras more valuable than European competitors BP and Royal Dutch Shell Group, with the third-largest market value of any oil company in the world after PetroChina Co. and Irving, Texas-based Exxon.

Extends Role

The probe coincides with a push by Gabrielli to press Brazil’s government to extend the company’s role in the development of the so-called pre-salt area that includes the Tupi and Carioca fields, where crude is trapped under salt as much as 5,000 meters below the seabed. Gabrielli is on the committee drawing up the new regulations. About 62 percent of the region has yet to be opened up to oil and gas exploration.

Petrobras is counting on new discoveries to boost output by more than half to 3.66 million barrels a day by the end of 2013. The company faces a “hard task” in meeting its output goal of 2.05 million barrels of crude a day on average in Brazil this year, Gabrielli said in the interview. Production averaged 1.958 million barrels daily in the first six months.

The 180-day inquiry could be extended into next year, when Brazil holds a presidential election, and affect the campaign, said David Fleischer, a political science professor at the Federal University of Brasilia. Lula’s chief of staff and preferred Workers’ Party presidential candidate, Dilma Rousseff, is the head of Petrobras’ board.

‘Negative’

“My one concern about things like Petrobras is, of course, it’s a company with fantastic resources but it’s in the realm of politics, which is typically for us quite a negative,” said Hugh Young, the Singapore-based Asian managing director and head of equities at Aberdeen Asset Management Plc, which oversees 129.2 billion pounds ($220 billion) globally.

Senator Romero Juca, the head of the government coalition in the Senate, said any effort by the opposition to make the Petrobras inquiry an electoral issue “would be more dangerous for the opposition than for the government.”

Since Lula first took office in January 2003, lawmakers have set up 25 committees to investigate everything from health insurance plans to piracy of industrial goods and corruption, according to CAC Consultoria Politica, a Brasilia-based political consultancy. While some ended without any conclusion, a 2005 investigation into allegations of Workers’ Party paid bribes to legislators in exchange for votes in Congress led to the resignation of Lula’s chief of staff, Jose Dirceu.

The probe “is a legitimate tool of the Congress,” Gabrielli said. “We will participate, responding with the maximum transparency as possible.”

To contact the reporter on this story: Helder Marinho in Rio de Janeiro hmarinho@bloomberg.net. Alex Ragir in Rio de Janeiro +55- aragir@bloomberg.net.