The Oil Boomtown That Never Was

▶ ▶ Itaboraí’s fuel refinery is yet another casualty of the corruption scandal engulfing Brazil ▶ ▶ “It’s empty inside. People say it will become a large warehouse”

Located just 30 miles east of Rio de Janeiro’s bustling Copacabana beach, Itaboraí looks like many oil boomtowns after the bust—except the empty glass towers that loom over this city of 220,000 speak of a bigger cataclysm than the collapse of crude prices. “They said this would be the new oil city,” says Jefferson Costa, one of scores of migrants from Brazil’s impoverished north lured here by a multibilliondollar petrochemical project that was supposed to create more than 100,000 jobs. Work on the complex, known as Comperj, has stopped, and unless new investors materialize, the single refinery now standing may never produce a single drop of fuel. “It’s empty inside,” says Costa, a plumber who lost his job five months ago when construction came to a halt. “People say it will become a large warehouse.”

Comperj has become a symbol of pervasive corruption at Brazil’s state-run oil producer, Petrobras. A sprawling investigation by federal police and prosecutors dubbed Operation Carwash has revealed massive graft, implicating construction conglomerates, banks, oil service providers, shipbuilders, and politicians. About 2 percentage points of the 3.8 percent contraction in Brazil’s gross domestic product last year can be attributed to the effects of the scandal on the company and its

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suppliers, according to estimates from Tendências, a consulting firm based in São Paulo.

Court documents related to the Carwash probe show that contracts at Comperj were rigged by a cartel of 16 companies, which made continual changes to the project to boost their gains. Kickbacks from the companies were divided among top Petrobras executives and politicians. Petrobras didn’t respond to requests for comment.

In 2008 then-president Luiz Inácio Lula da Silva donned a white Petrobras hard hat for a rally in Itaboraí. Standing next to a bulldozer, he told the assembled crowd that machines would soon swarm Comperj’s empty construction site. By then, the budget for the complex had swelled to $8.4 billion, more than triple the $2.5 billion earmarked in 2004, when the project was first approved. At this point, it has drained more than $14 billion. A similar-size refinery in Qatar is scheduled for completion as early as this year at a cost of $1.5 billion.

Shortages of skilled labor and suppliers typically add 30 percent to 40 percent to the tab for a refinery in South America, according to John Auers, executive vice president at Turner, Mason, an engineering firm in Dallas. But with political meddling, graft, and bad management, “costs can spiral out of control.” That’s what Auers believes happened at Comperj.

In an April 22 regulatory filing, Petrobras said an internal audit had uncovered irregularities in the purchase of goods and services for its refinery projects. The company has said that it’s cooperating with the Carwash investigation and taking legal steps against people and companies that may have harmed its reputation and finances.

The damage to both has been considerable. Petrobras has reduced its planned five-year capital budget to $98.4 billion from a peak of $236.5 billion four years ago. The company is now about a seventh of its market value in mid-2008. Some of the investors who bought the stock in a record-setting $70 billion public offering in 2010 are suing the company for issuing false statements, overstating asset values, and accepting bribes— claims that Petrobras disputes.

Marcelo Odebrecht, the former chief executive officer of Brazil’s largest engineering and construction company, was sentenced to 19 years in prison in March for allegedly coordinating 109 million reais ($31 million) in bribes to secure contracts for Comperj and other Petrobras projects. In a statement, Odebrecht’s defense lawyer vowed to appeal the judgment. The Carwash investigation has so far resulted in more than 100 arrests.

The ripple effects from the scandal are being felt in other industries. Sete Brasil Participações, an oil rig provider created to supply Petrobras, filed for bankruptcy last month. That in turn forced National Oilwell Varco, the largest maker of oilfield equipment in the U.S., to erase $2.1 billion from its order book for 15 floating rigs it had agreed to supply to Sete.

Conceived as a seven-plant complex, Comperj is now down to a single, 165,000-barrel-a- day fuel refinery. And that will come online only if Petrobras can find an outside investor to pony up at least $2 billion, says Roberto Moro, the company’s head of engineering. Even under a best- case scenario, Comperj won’t be operational until 2023.

In the meantime, gloom has descended upon Itaboraí, whose ambitions to reinvent itself from an orangegrowing area into nto an oil industry hub depended on Comperj. Several residential and business towers built ilt to accommodate an influx of Petrobras employloyees and service e workers, along with a mall with h room for 150 storesores and a movie theater, are mostly vacant. Costa, the plumber, sent his family north to their home state of Pará while he tries to find work. “We always hope it will get better,” he says. “But it only gets worse.” �Sabrina Valle and Carlos Caminada, with Robert Tuttle and Peter Millard

The bottom line A petrochemicals complex being built by Brazil’s state-run oil company is massively over budget and may never be completed.