Sinopec and Petrobras: more than oil in common

Investigation into Sinopec’s Brazil projects won’t hurt oil giant but it has problems at home

Two of the world’s largest state-owned oil companies – Brazil’s Petrobras and China’s Sinopec – are mired in major corruption scandals. But the connection doesn’t end there. In December last year, as part of anti-corruption investigation operation Lava Jato (operation Car Wash in English), Petrobras was forced to cancel a contract with Brazilian engineering company Galvão Ingeniería, with whom Sinopec had entered into a ‘strategic alliance’. The two companies formed an engineering, procurement and construction (EPC) consortium in order to develop a nitrogen fertilizer unit in Mato Grosso do Sul, in Brazil’s agro-industrial heartland. Laja Jato investigators are looking into an alleged kick-back scheme in which Petrobras awarded overvalued contracts to engineering firms with excess revenues going to contractors and the ruling Worker’s Party (PT). The scandal is threatening to lead to the impeachment of President Dilma Rousseff, who was chair of Petrobras between 2003 and 2010. Chinese executives have not been implicated in the Petrobras scandal and nor has the episode deterred the country’s investors, who have now loaned Petrobras a total of US$ 7billion. “For us it is very difficult to understand the reasoning behind China’s decision to maintain the line of credit,” said Alejandro Salas, Transparency International’s Regional Director for the Americas, who added that investors can and should seek guarantees that their money is being spent correctly. But Salas believes there is no reason for the Petrobras scandal to reflect badly on Sinopec. Owing to pressing energy and food demands, Chinese state-backed companies have been investing heavily in Latin America, which has become a principal destination for investment in agricultural supply chains. The overuse of chemical fertilizers at home has led to the degradation of much arable land in China and forced it to look overseas to source food for its 1.3billlion citizens. But aside from the Galvão plant, at which operations have now been suspended, Sinopec has other concerns. Company president Wang Tianpu, who was arrested on suspicion of carrying out a host of illicit practices including seeking bribes and using company funds for personal gain, has been expelled from the Communist Party. As part of his anti-graft drive, President Xi Jinping announced last week that the state-owned oil giant would sell-off the 4,300 company cars and most of the hotels it owns in order to clean up its tarnished image. Car wash splashes Sinopec Once completed, the Galvão unit aims to produce 1,200 tons of urea and 70 thousand tons of ammonia annually, thanks to investment estimated at 3.1 billion Brazilian Reales ($US 780million). But payments into company accounts have been suspended with the plant said to be only 80% complete. Earlier this year, the press announced a plan to create a new bidding process for a different company to finish construction. The Federal Auditing Court (Tribunal de Cuentas de la Unió in Portuguese), an arm of the Federal Government that monitors financial accounts, also found that the contract for the Southeastern Gas Pipeline, known by the acronym GASENE, was overvalued by a whopping 1,800%. Sinopec signed contracts to construct two stretches of the pipeline in what were its first deals in Brazil. More than twenty companies have been summoned by the Court, among which are Andrade Gutiérrez, Queiroz Galvão, Camargo Corrêa and Odebrecht – Brazil’s four largest engineering companies. But according to Salas, the Petrobras brand has not become “toxic” as clients can still sign agreements with the oil company and do their part to promote a transparent agenda and to publish clear information and regulations. And Salas says despite the scandal, Petrobras should continue to be a solid pillar of the country’s development. The main problem it has is a lack of transparency, but the Brazilian government now has a historic opportunity to improve its practices, he says. Sinopec in Brazil Sinopec gained a foothold in Brazil in 2005, but increased its involvement in the country in November 2010, when it bought 40% of Brazilian assets owned by the Spanish oil company Repsol for US$ 7.1billion. The following month, when it launched operations in Argentina, it acquired Occidental Petroleum. Sinopec returned to Brazil to purchase 30% of assets held by Portuguese company Galp for US$ 5.2billion with the intention of increasing oil production to satisfy China’s growing energy demand. China Development Bank (CDB) granted a loan of US$5 billion, of which US$3.5 billion has already been disbursed with the remainder signed off during Chinese Prime Minister Li Keqiang’s Latin America tour. It was announced that repayment of these loans would be made with oil.