By Jeb Blount
RIO DE JANEIRO (Reuters) - Petrobras' decision to take a massive $17 billion (11.20 billion pound) write-down to account for overvalued assets and corruption-related costs is only the start of a broad overhaul needed to revive Brazil's troubled state-owned oil company.
While many have focussed on the $2.1 billion, or 12 percent of the write-down, related to money siphoned off in a price-fixing, bribery and political-kickback scheme - Brazil's biggest-ever corruption scandal - it is the remaining $15 billion that calls for greater attention.
Those write-offs reflect bad investment decisions, flawed execution, political interference and falling oil prices, Petroleo Brasileiro SA (SA:PETR4) acknowledged when it released audited 2014 results on Wednesday.
"The write-downs show Petrobras suffers more from incompetence than corruption," said John Forman, a former board member of Brazil's oil regulator ANP.
A management team beholden to politicians, nationalist oil laws that leave Petrobras overstretched, and a record debt load of $106 billion - not corruption - remain the greatest threats to the company and to Brazil's economy, which heavily depends on the state energy giant for investments.
After years of rising spending and project delays, Petrobras is the world's most-indebted oil major, a burden that limits its ability to complete investments needed to boost oil and gas output.
President Dilma Rousseff on Friday said that this week's result release and write-downs show that Petrobras "has overcome all its management problems."
Analysts, however, disagree.
"The company is very leveraged," said Frederico Mesnik, a partner at asset manager Humaitá in São Paulo. "We need big changes, starting with the replacement of the management team in favour of non-politically appointed names."
More than two-thirds of the non-corruption write-offs were on the Comperj and Abreu e Lima refineries, which were among the biggest projects in Rousseff's flagship infrastructure plan. They have already cost more than $15 billion each, well over budget, but remain incomplete after years of delays.
Both went ahead without proper planning, government auditors say, in part because management faced political pressure to invest in the projects.
Economists estimate that Petrobras-related problems could cut up to 1.5 percentage point from Brazil's gross domestic product this year, adding pain to an economy already expected to enter its worst recession in two decades.
COSTLY NATIONAL CONTENT
As Petrobras tries to turn the page on the corruption scandal, it also faces strict national content rules that impose high costs and result in questionable quality.
For example, Sete Brasil, contracted to build 28 deepwater drill ships worth nearly $1 billion each, is in financial trouble. Its domestically-built vessels are supposed to be leased to Petrobras for more than $500,000 a day when complete.
Because of lower oil prices, drilling rigs are now readily available in the world market for $400,000 a day or less. But the government's scramble to save Sete Brasil may saddle Petrobras with the costlier option.
While pledging financial discipline, new Chief Executive Aldemir Bendine has sought to play down investment constraints, stressing Petrobras' importance for Brazil's economy, leading some to question his commitment to the company's overhaul.
"That leaves us with the impression that Petrobras will continue to be 'more of the same,'" said oil analyst Vinicius Canheu of Credit Suisse (SIX:CSGN) in São Paulo.
Gustavo Gattass at Banco BTG (LONDON:BTG) Pactual says there is an 80 percent chance Petrobras will face the need to sell new stock or swap debt for shares in the next 12 months to finance investment.
The resulting dilution would be a blow to investors whose Petrobras shares have already fallen by more than 50 percent in seven months.
PRODUCTION CONCERNS
For years the government forced Petrobras to subsidise domestic fuel prices, causing billions in refining losses.
This also prevented Petrobras from attracting refining partners, adding to this week's write-downs. Investors have long wanted Petrobras to announce a clear fuel-price policy, but Bendine has so far balked at doing so.
Cheaper oil also forced Petrobras to write down 9.8 billion reais ($3.30 billion) of exploration and production assets, an area where the company is overstretched.
Under a 2010 law that increased the state's role in the oil sector, Petrobras must own at least 30 percent of all new exploration projects in the country's most prolific offshore region whether it wants to or not.
Because Petrobras must also run the areas, Brazil may face the choice of forcing the company to make investments it can ill afford or forego new exploration to protect Petrobras finances. Calls to end the Petrobras requirements and open the areas to other companies have fallen on deaf ears in Brasilia.
Bendine did commit Petrobras to lower 2015 spending to $29 billion, a third below the projected 2014-2018 annual average, and cut it to $25 billion in 2016.
But expected production growth of 4.5 percent this year and 3 percent in 2016 is unlikely to generate enough cash to reduce debt. And the investment cuts do not necessarily mean the company will stop spending on money-losing projects.
"Petrobras has lots of potential," said Forman, the former ANP director. "But it's hard to be optimistic about a company that has so many bad habits and is run by a government that won't admit the heavy cost of its policies."
