Scan­dal in Brazil snares re­fin­ery

Lo­cals un­aware of le­gal is­sues over pur­chase of Pasadena plant

Houston Chronicle - - FRONT PAGE - By Mi­hir Zaveri, Su­san Car­roll and Ben Tavener

Sand­wiched be­tween U.S. and Texas flags, the Brazil­ian ban­ner waves out­side a set of dis­col­ored tanks and pipes at the site of a Pasadena re­fin­ery. A sign marked “PRSI” — for Pasadena Re­fin­ing Sys­tem Inc. — hangs over chain link fence with ra­zor wire that sur­rounds the com­pound that dates back nearly a cen­tury.

From her porch, Hilda Perez and neigh­bor Lorie Soliz can see that re­fin­ery across a grassy field and train tracks — its glow­ing flares and sul­furous fumes are fa­mil­iar. Both friends re­mem­ber four years ago when an ex­plo­sion there rocked the neigh­bor­hood and a gi­ant flame rose into the sky. “There’s al­ways some­thing go­ing on over there,” said Soliz, who has lived in the neigh­bor­hood since 1992.

But they didn’t know that their home­town re­fin­ery — owned by Brazil­ian state-run oil com­pany Petro­bras — has be­come a flash­point in an ex­plo­sive po­lit­i­cal scan­dal abroad.

Brazil­ian of­fi­cials are in­ves­ti­gat­ing al­le­ga­tions that Petroleo Brasileiro S.A. — Petro­bras — over­paid hun­dreds of mil­lions of dol­lars for the Pasadena re­fin­ery and fun­neled money into a mas­sive kick­back scheme that’s led to dozens of con­vic­tions and ar­rests and fu­eled calls for the im­peach­ment of the coun­try’s Pres­i­dent Dilma Rouss­eff, who chaired the com­pany un­til 2010.

One of prose­cu­tors’ first ma­jor dis­cov­er­ies in their on­go­ing in­ves­ti­ga­tion was that Petro­bras over­paid in its pur­chase of Pasadena Re­fin­ing Sys­tems Inc. in a se­ries of trans­ac­tions dat­ing back to 2006.

Petro­bras, Brazil’s largest com­pany, paid about $1.2 bil­lion for the nearly cen­tury-old re­fin­ery com­plex — al­most 30 times the amount the Bel­gian com­pany As­tra Oil pur­chased it for in 2005, ac­cord­ing to Brazil­ian prose­cu­tors and court records. Petro­bras it­self is one of the world’s largest re­fin­ers. The Pasadena re­fin­ery on Red Bluff Road is Petro­bras’ only U.S. re­fin­ery — with a pro­duc­tion of more than 100,000 bar­rels per day and more than 500 con­tract and per­ma­nent em­ploy­ees.

One former ex­ec­u­tive has ad­mit­ted to be­ing of­fered a $1.5 mil­lion bribe to al­low the Pasadena deal to go through, records show, and Brazil­ian prose­cu­tors are in­ves­ti­gat­ing whether politi­cians also re­ceived kick­backs from the pur­chase.

“We were ab­so­lutely dumb­founded, not to men­tion ex­tremely con­cerned, by what we found,” Mar­i­nus de Vries Mar­sico, a pros­e­cu­tor at Brazil’s Fed­eral Ac­counts Court said of the Pasadena deal in an in­ter­view with the Hous­ton Chron­i­cle. “There were such fla­grant, in­de­fen­si­ble ir­reg­u­lar­i­ties that it was easy to see what a cat­a­strophic deal it was.”

Lit­tle at­ten­tion here

He and other Brazil­ian in­ves­ti­ga­tors say Petro­bras con­tracts world­wide were sys­tem­at­i­cally over­in­flated by cor­rupt former ex­ec­u­tives and a “car­tel” of con­struc­tion com­pa­nies that skimmed off money for them­selves and paid off politi­cians, lob­by­ists and money laun­der­ers.

In cor­po­rate fil­ings and news state­ments, Petro­bras spokes­men claim the com­pany is a vic­tim. In an April 2015 fil­ing with the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion, Petroleo Brasileiro S.A. es­ti­mates that the com­pany over­paid more than $2.5 bil­lion in “cap­i­tal­ized costs” for “the ac­qui­si­tion of prop­erty, plant and equip­ment in prior years.” Petro­bras states in the fil­ing the money was used to fund “im­proper” pay­ments to po­lit­i­cal par­ties, pub­lic of­fi­cials, con­trac­tors, former Petro­bras em­ploy­ees and “other in­di­vid­u­als in­volved in the pay­ment scheme.”

Petro­bras of­fi­cials did not re­spond to re­quests for com­ment for this story.

Petro­bras, which has a U.S. sub­sidiary called Petro­bras Amer­ica Inc., re­ported in the April 2015 fil­ing that it was sub­poe­naed by the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion in Novem­ber 2014, and is co­op­er­at­ing with the agency’s re­quest. It’s un­clear from Petro­bras’ dis­clo­sure whether the SEC probe specif­i­cally fo­cuses on the Pasadena deal or how the re­fin­ery’s op­er­a­tions could be im­pacted. SEC of­fi­cials de­clined com­ment.

The rev­e­la­tions have seized the pub­lic’s at­ten­tion and gen­er­ated mas­sive protests in Brazil. But the Texas re­fin­ery’s role in the scan­dal has got­ten scant at­ten­tion back in Pasadena.

“I’ve never heard any­thing about” it, said Pasadena Coun­cil­man Or­naldo Ybarra, whose dis­trict en­com­passes the area around the re­fin­ery. “From our per­spec­tive at the lo­cal level, there hasn’t been any is­sue.”

Value of fa­cil­ity

Bal­ti­more-based Crown Cen­tral Petroleum erected the re­fin­ery in 1920 in what was then a ru­ral com­mu­nity cov­ered by straw­berry fields.

“Crown was a ma­jor em­ployer as Pasadena tran­si­tioned from its agri­cul­tural econ­omy to in­dus­trial,”

said Pasadena res­i­dent C. David Pomeroy Jr., a lo­cal his­to­rian.

Crown fur­nished the city with its first fire­fight­ing equip­ment and em­ployed en­listed men wait­ing to de­ploy dur­ing World War II. Lo­cal res­i­dents — in­clud­ing Pomeroy’s fa­ther — found work at the re­fin­ery as valve hands, main­te­nance work­ers and en­gi­neers. But later the re­fin­ery be­came the site of a bit­ter la­bor dis­pute that in­cluded a years­long lock­out. In 1998 it paid a $1 mil­lion fine for air qual­ity vi­o­la­tions — then a Texas record.

In Jan­uary 2005, Bel­gian group As­tra Transcor pur­chased the re­fin­ery for $42.5 mil­lion and later reached out to Petro­bras about a part­ner­ship, Brazil­ian court records show.

That year, a Texas-based con­sult­ing firm hired by Petro­bras as­sessed the re­fin­ery’s value at $126 mil­lion. But Petro­bras then did its own es­ti­mate of the re­fin­ery’s value and pegged it at $745 mil­lion. “Petro­bras then adopted this re­sult as the ba­sis for the of­fers it pre­sented” to As­tra, Brazil­ian court records show.

Petro­bras ini­tially paid about $431 mil­lion for its 50 per­cent stake in the re­fin­ery and in a trad­ing com­pany that would hold the right to sell the re­fin­ery’s prod­ucts, ac­cord­ing to the Brazil­ian court records.

Petro­bras Amer­ica Inc. part­nered with As­tra Oil Trad­ing NV, and two other in­ter­re­lated com­pa­nies — As­tra GP Inc. and As­tra Tradeco LP LLC — in the deal, ac­cord­ing to a U.S. fed­eral court records.

But the part­ner­ship soon turned sour.

‘High level of cor­rup­tion’

To set­tle the con­tract dis­pute, As­tra of­fi­cials went first to an ar­bi­tra­tion panel and then to fed­eral court to in­voke con­tract rights to try to force Petro­bras com­pa­nies to buy them out, U.S. fed­eral court records show. The par­ties fought over what Hous­ton-based U.S. Dis­trict Judge Ewing Wer­lein Jr. de­scribed as “strate­gic vi­sion” in a re­lated 2010

U.S. fed­eral court record. One As­tra ex­ec­u­tive sent a 750-page email de­tail­ing “sig­nif­i­cant prob­lems” with the joint ven­ture.

Petro­bras even­tu­ally agreed out of court to pay an­other $820 mil­lion, Brazil­ian court records say.

That meant Petro­bras paid about $1.2 bil­lion to As­tra for the Pasadena re­fin­ery, in­clud­ing its ini­tial in­vest­ment and the set­tle­ment pay­ments, ac­cord­ing to Brazil­ian court records.

Brazil­ian au­di­tors later con­cluded that a hand­ful of former Petro­bras ex­ec­u­tives were re­spon­si­ble for the over­pay­ment in Pasadena and or­dered that $792 mil­lion be re­turned to Petro­bras.

Marisco said the Brazil­ian crim­i­nal probe of the Pasadena re­fin­ery deal be­gan in 2013, and of­fered “a first in­di­ca­tion of the high level of cor­rup­tion in Petro­bras’ ac­tiv­i­ties.”

“The Pasadena deal was an af­front to Brazil; it was a joke that dam­aged Brazil’s rep­u­ta­tion for be­ing able to do busi­ness in a se­ri­ous, re­spon­si­ble way,” Marisco said.

Paulo Roberto Costa, who was Petro­bras’ di­rec­tor of re­fin­ing from 2004 to 2012, told in­ves­ti­ga­tors he had reser­va­tions about the Pasadena pur­chase, de­scrib­ing the re­fin­ery as “very old,” and in need of se­ri­ous up­grades. Costa said last fall that he was of­fered $1.5 mil­lion to “not to cause prob­lems” at an ap­proval meet­ing of that deal, ac­cord­ing to a state­ment Costa made to Brazil­ian of­fi­cials as part of a plea bar­gain.

Mar­sico said he and his col­leagues will in­ves­ti­gate the link be­tween Petro­bras and As­tra, the com­pany on the other side of the “per­ni­cious” Pasadena sale, to see if any­one else should be held ac­count­able.

As­tra of­fi­cials did not re­spond to emails and calls to their at­tor­neys and to their of­fices in Hous­ton.

In Brazil, about 500 peo­ple and com­pa­nies are un­der in­ves­ti­ga­tion for their al­leged in­volve­ment in the Petro­bras kick­back scheme, known as “Oper­ação Lava Jato,” or “Op­er­a­tion Car Wash.” To date, 43 peo­ple have been con­victed and sen­tenced to jail terms and fines over of­fenses rang­ing from cor­rup­tion and money laun­der­ing to crim­i­nal as­so­ci­a­tion, and in­ves­ti­ga­tions con­tinue. This month al­le­ga­tions sur­faced that a Brazil­ian sen­a­tor who was not pre­vi­ously un­der sus­pi­cion re­ceived a kick­back of at least $1 mil­lion in con­nec­tion with the Pasadena re­fin­ery pur­chase.

“The in­for­ma­tion doesn’t stop com­ing,” said Mon­ica Ar­ruda De Almeida, an ad­junct pro­fes­sor at the Cen­ter of Latin Amer­i­can Stud­ies at Ge­orge­town Univer­sity. “The speed with which things are still evolv­ing is just amaz­ing.”

In the con­text of global cor­po­rate scan­dals, the Petro­bras case is “huge,” said Tom Fox, a Hous­ton lawyer who spe­cial­izes in cor­po­rate com­pli­ance with the For­eign Cor­rupt Prac­tices Act. “It’s huger than huge,” he said.

En­vi­ron­men­tal is­sues

The dozens of con­vic­tions in Brazil so far in the probe in­clude lob­by­ists, money chang­ers, and ex­ec­u­tives both from Petro­bras and con­struc­tion industry gi­ants. Former Petro­bras di­rec­tor Re­nato Duque has re­ceived the largest in­di­vid­ual jail sen­tence so far: 20 years and 8 months.

There have been no pros­e­cu­tions to date in the U.S.

Un­der Petro­bras own­er­ship, the Pasadena re­fin­ery has had its share of en­vi­ron­men­tal prob­lems — in­clud­ing the 2011 ex­plo­sion. In 2012, Har­ris County re­ceived a $750,000 set­tle­ment from the re­fin­ery for al­leged en­vi­ron­men­tal vi­o­la­tions, in­clud­ing fail­ing to con­trol emis­sions, records show. Fed­eral work­place safety of­fi­cials have fined the com­pany $56,500 since 2010.

Still, Pasadena Coun­cil­man Ybarra has seen no signs of ma­jor flaws. He said he views Petro­bras as a good cor­po­rate neigh­bor that con­trib­utes to char­i­ta­ble causes.

Michael Cia­glo / Hous­ton Chron­i­cle

Brazil­ian state-run oil com­pany Petro­bras paid more than $1 bil­lion to buy the Pasadena re­fin­ery, much more than the $42.5 mil­lion paid by As­tra Transcor in 2005. The pur­chase of the re­fin­ery is now part of a Brazil­ian in­ves­ti­ga­tion into an al­leged...

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