The “Lava Jato” scandal, which US-based global energy law firm Mayer Brown is calling the “largest corruption investigation in the world,” has taken an economic toll on Petroleo Brasileiro SA (Petrobras), and is creating several business opportunities. Melissa Sustaita explains.
Petrobras offices in Brazil. Image from OE staff.
Lava Jato hit Petrobras’ financial status, leaving the Brazilian oil company’s audited financial reports reflecting a US$2.1 billion write down for corruption, and a $14.8 billion impairment. It has come down to revising its business and investment plans, including divestments that are opening up Brazil’s doors to other companies and leaving the playing field wide open.
“There are a lot of collateral issues out here that have flown from this investigation,” William Michael Jr., Mayer Brown partner said. “It is an extremely complex, ongoing process that will be lasting for a very long time, and have huge global impact around the world in all businesses in all industries.”
Petrobras is implementing a $15.1 billion divestment plan until 2016 and realigning its priorities that include allotting 30% to exploration and production (E&P); 40% to gas and power; and 30% to its downstream sector, to be included for sale.
“At least $5 billion in assets are already available for potential buyers,” said Mayer Brown partner Victor Galante. “The plan is to expand it to $42 billion in 2018.”
According to Mayer Brown, Petrobras has already announced offshore, upstream assets as part of its divestment plan, which include:
In addition, there are some onshore areas for sale; thermoelectric power plants and its Liquigas business in its gas and power sector; and several assets in its downstream sector for sale.
Companies on the blacklist. From Mayer Brown.
The controversy surrounding the international scandal has also resulted in a “blacklist” of companies that have been affected, in addition to several canceled contracts.
Companies on the blacklist have suffered from bankruptcy or the possibility of going bankrupt. On the other side, non-corrupt companies are looking for replacements to work with, that are not connected to Lava Jato, for ongoing work and future projects, Galante said.
Lava Jato will also impact Brazil’s 13th bid round in October, which will have a total of 269 offshore and onshore blocks of mature, new frontier areas, and high-potential basins up for grabs.
According to Galante, the 13th bid round will likely have reduced participation from Petrobras, which will open these 269 blocks to new players, including foreign companies.
“The blacklisted companies listed are not able to participate in the next bid round, another reason for foreign companies to come to Brazil,” Galante said. “Now, I think for new projects in Brazil, compliance will be a big issue, and more important every day for companies wanting to operate in Brazil.”
Main business implications lead to possible buyer’s market
Image from Petrobras.
According to Mayer Brown, there are several business implications stemming from Lava Jato. Many of the companies that have been linked to the scandal are under financial constraints, or under judicial reorganization. The smaller suppliers are facing cash flow problems, mostly due to payment delays by Petrobras. There is also distrust among foreign investors, and implications to Petrobras’ shareholders.
With all of this, Mayer Brown said that the scandal might open up a buyer’s market, especially with the divestment plan Petrobras is undertaking that is causing the company to sell off some of its assets.
But it doesn’t stop there. Not only is Petrobras under the gun to sell, the companies involved in the scandal are also selling their assets.
This opens the market to new investors and foreign companies to operate in Brazil, in addition to small- and medium-sized companies that now do not need to work under the shadows of the big Brazilian companies like Petrobras and Odebrecht, Galante said.
Galante also said that big changes are expected throughout the entire industry including new opportunities in Brazil; fast transactions from Petrobras’ desperate need to follow its divestment plan, and other companies that want to avoid the possibly of bankruptcy.
Lava Jato catches international attention
Brazilian federal police. Image from Mayer Brown.
Lava Jato was first revealed in 2009, and consisted of large-scale bribery of government officials and money laundering conducted by illegal money brokers using gas stations, hence the name “Car Wash,” or Lava Jato in Portuguese.
Five years later, in March 2014, Brazilian federal police uncovered a $2.9 billion (BRL $10 billion) embezzlement and money-laundering scheme led by money changers, specifically Alberto Youssef, and issued 130 judicial warrants. At this time, former Petrobras supply officer Paulo Roberto da Costa was arrested for participating in the scheme, and for destruction of evidence connecting him to Youssef.
This has led to a domino effect of warrants, arrests and convictions on a global scale, with worldwide collaboration to investigate those involved in Lava Jato.
“This is like a jigsaw puzzle when you’re an enforcement agency. You’re looking at what benefits you can bring to a large border investigation that the other agencies might not be able to have,” said Michael. “Because this is in fact such a huge investigation, there are a lot of collateral issues associated.”
With so much happening within the past year alone, the scandal has been in the forefront of the news.
“This has become like a soap opera. Every one gets to their houses to turn on their TVs to watch the news at night, not to watch the developments of regular soap operas, but every body is curious and excited to know about the development of this investigation,” Salim Jorge Saud Neto, Mayer Brown partner said.