Pump-priming Disaster?

Petrobras reacts slowly to safety concerns and drills its bottom line.

PETROBRAS, LATIN AMERICA'S largest publicly traded company, has been pushing for record output and profits. But what it's been getting is a growing slick of costly accidents. In one of the state oil company's worst accidents ever, a series of explosions on March 15 killed 11 workers and sent the world's largest floating oil platform to the bottom of the South Atlantic.

For the three days leading up to the accident, rig managers had issued repeated internal bulletins saying a malfunctioning part needed to be replaced to alleviate a gas-pressure problem. Although it appears the gas build-up was not linked to the blasts, the rig managers decided not to temporarily shut down the platform, named P-36, to wait for a replacement part--underscoring ongoing criticism that Petrobras is pushing too furiously and too fast.

"Any Petrobras manager would have a hard time shutting down a rig that represented 6% of Brazil's oil production," says Mauricio Rubem, director of the Oil Workers Federation (FUP), which represents all 19 oil worker unions. "Especially when he knew that boosting oil output was the company's No. 1 priority."

The oil platform debacle will reduce Petrobras net income by at least US$100 million in 2001 (down from the first post-accident estimates, which ran as high as $450 million), according to company estimates. The accident has also cut, to 9%, its ambitious output goal of 12% growth this year. And when Petrobras renewed its insurance policy for rigs, refineries, terminals and other fixed assets in late March, the premium jumped: it used to be $7 million for 12 months of coverage; it's now $48.8 million for 14 months.

The LATIN TRADE consensus forecast predicts Petrobras sales will fall almost 20%, to US$21 billion, in 2001. This year's profits, meanwhile, are poised to drop 10% to $4.5 billion. Nor does 2002 promise a recovery, with sales expected to decline another 11%, to $18 billion, and profits to sink 17% to $3.7 billion.

After the P-36 oil rig accident, Petrobras CEO Henri Philippe Reichstul was called before the Brazilian Senate. He told lawmakers that the rig managers advised their onshore superiors of the gas-pressure problem then decided to keep the platform running because personnel had found a temporary solution--which is why he wasn't notified of the problem until after the accident. He said the rig managers were authorized to make such decisions.

But the rig managers might have been reacting to a new tone at the oil giant. Since 51-year-old Reichstul, took the Petrobras helm in 1999, production has jumped by double-digit percentages. In February, he announced a four-year, $29.4 billion program mainly aimed at boosting output almost 50% to 1.9 million barrels per day by 2005--almost enough to meet national needs.

At that pace during a time when petroleum prices are high, there is little incentive for the government to scrutinize the oil giant's production push. Petrobras' record $5.52 billion in net profits-almost five times the 1999 level--accounted for more than a quarter of the government's $20.8 billion budget surplus in 2000. The oil company's increased output also helped pare oil imports by 11% and prevented a $691 million trade deficit from widening.

The push price. But the production push at both rigs and refineries is exacting a human and environmental toll. The P-36 accident joined two others at sites in the Campos Basin, Brazil's largest oil producing region, to bring the number of fatalities to 14 this year. Spills during the last 12 months, meanwhile, have dumped almost 7 million liters of oil and byproducts into offshore basins, rivers in southern Parana state and even Rio de Janeiro's famed Guanabara Bay.

Federal and state environmental protection agencies describe the accidents as the worst in 25 years and have slapped Petrobras with $130 million in fines. The most recent fines were $7.8 million for the 1.5 million liter spill caused by the oil platform accident and $1.3 million for a 25,000-liter spill that occurred a few weeks later.

"Petrobras is a reactive company which tries to solve problems after they occur, not before," says Roberto Kishinami, the head of Greenpeace in Brazil. "Just when it thinks it's reacted well to one problem, another springs up."

Environmentalists, labor leaders, engineers and safety specialists say a production push is not the only reason for the accidents. They point to cost-cutting, including Petrobras' failure to invest in worker training and safety programs.

"After the Guanabara Bay accident, we discovered that the company wasn't investing enough in worker security and environmental safeguards," says Petrobras President Reichstul. "That's when Petrobras drew up a three-year, $1 billion safety program, one which refutes the accusation that our company, in the name of accelerating oil production, is not concerned about environmental and worker safety questions."

The program seeks to avoid or minimize refinery and platform gas leaks and oil spills, and Irani Varella, Petrobras' director of security, environment and health, says $75 million has been earmarked for worker training. But union leaders claim Petrobras saves money by outsourcing to small companies with poorly trained employees, especially for maintenance and high-risk operations. In the past three years, 67 of the 93 oil workers killed in accidents at Petrobras facilities were employed by contractors or subcontractors, according to union statistics.

Petrobras outsources 1.2 jobs for every one of the 33,000 oil workers on its payroll, according to Jose Lima, Petrobras' manager of human resources. But Lima says that means workers with more--not less--training are tackling the assignments. "Besides outsourcing is common in the oil industry worldwide, due to its high degree of specialization," Lima says.

Still, Fernando Siqueira, the president of the Petrobras' engineers association (Aepet), says that "in the United States, oil-sector outsourcing is done by companies which are more serious and professional than they are here. That makes Petrobras' excessive oil-sector outsourcing here a far riskier proposition."

Big rig winner. Siqueira and union leader Rubem of FUP have also charged that between 1995 and 1999--just before Reichstul came on board--Petrobras awarded 80% of its drilling and production rig contracts (including the one for the P-36 rig) to Rio de Janeiro-based contractor Maritima Petroleo e Engenharia. "So many contracts led Maritima to have financing problems and delays in delivering rigs and doing so within budget," says Siqueira. "Petrobras just put too many rig contracts in the hands of one company, which proved to be unreliable."

However, Segen Estefen, the director of the Rio de Janeiro-based Coppe firm, the biggest engineering research institute in Latin America, says the cause of the oil platform accident was likely its design, done by Petrobras, not sloppy work by Maritima. Estefen told the Senate that the explosion probably occurred in an oil residue tank located in one of the rig's four support towers. He says such tanks are normally located in open-air places, not in the airtight towers.

In a preliminary report, a committee set up by Petrobras to investigate the accident has also mentioned that the location of the waste oil tank in the support column was one of the probable causes of the explosion. That committee, has recommended that Petrobras design no more platforms with the waste oil tanks in the support towers. The P-36 was the only Petrobras platform with this design.

Before the committee's preliminary report was released, Petrobras Services Director Antonio Menezes maintained that "the P-36 rig was well-designed, certified, seaworthy and safe. Period."

Reichstul says the investigations "will help prevent another such accident from happening." Kishinami of Greenpeace believes that the accident will force Petrobras to increase safety precautions on all its rigs.

"Drilling for and producing offshore oil poses a threat to oil workers and the environment," says Kishinami, "and the more you accelerate the pace of such endeavors, the more you increase the likelihood of accidents happening."