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Charles Kennedy

Charles Kennedy

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Corruption Scandal Will Cost Petrobras At Least $2.1 Billion

The Brazilian state-owned oil company has released its first financial statements in 8 months – and it doesn’t look good.

Petrobras has been embroiled in a corruption scandal that has weighed down its share price and sent shockwaves through Brazil’s political and economic establishment. Long held up as a national symbol, Petrobras is now struggling to regain its footing.

After the scandal surfaced – which consisted of an elaborate bribery and kickback scheme that went all the way to the top – Petrobras was unable to contain or even put a price tag on the financial losses related to the conspiracy. Related: How The Majors Are Playing The Oil Price Slump

However, the company has finally come up with a number: $2.1 billion in losses stemming directly from corruption. That number could rise further if investigators find more problems.

The damage done to Petrobras has rippled through the Brazilian economy. Billion dollar projects have been stalled and may not move forward. Less construction, bankruptcies and setbacks for contractors tied to Petrobras, and a general slowdown across the Brazilian oil and gas industry is expected to drag the Brazilian economy down. Brazil is projected to enter into a recession this year. Related: Exxon Urges U.S Congress To Soften LNG Export Laws

Petrobras also wrote down billions of dollars in assets that were overvalued, and stated that it will no longer pay dividends to shareholders.

Still, the release of financial figures is a sign of progress for the beleaguered firm. Having missed several previous deadlines, Petrobras risked triggering a technical default. The publication of financials will allow Petrobras to return to good standing with creditors and bond markets. A recent rise in its share price reflects more confidence in the company’s trajectory. Related: What Happens To US Shale When The Easy Money Runs Out?

But the future is uncertain. Petrobras still has to subsidize fuel for Brazilian consumers despite oil prices having fallen by half since 2014. Even before the drop in oil prices and the revelation of extensive graft, Petrobras was the world’s most indebted oil company. Now, trying to repair the damage, Petrobras has decided to slash capital expenditures by more than a third and is undertaking a large plan to divest itself of some assets in order to raise cash.

That will result in a much more modest production level over the long-term as the ambitious plans to tap ultra-deep pre-salt oil reserves and dramatically raise production will likely be unobtainable, at least to the extent the company had hoped. Petrobras will be able to proceed more gradually in the pre-salt, but a surge in production is unlikely for the foreseeable future.

By Charles Kennedy of Oilprice.com

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