Petrobras Rig Bust Threatens Rolls-Royce Deal: Corporate Brazil

Petrobras Rig Bust Threatens Rolls-Royce Deal: Corporate Brazil

By Christiana Sciaudone Peter Millard

12:00 AM BRT  February 26, 2015

(Bloomberg) — Rolls-Royce Plc and General Electric Co. are among oil-industry suppliers whose contracts in Brazil may be casualties of the spreading corruption scandal involving Petroleo Brasileiro SA.

The two companies were set to make parts for seven drillships ordered by Petrobras’s rig supplier, Sete Brasil Participacoes SA. Sete said this week that EAS, the shipyard it hired to build those rigs, is canceling the contracts.

The dropped order illustrates how far-reaching the effects of the corruption scandal at state-run oil producer Petrobras have spread. Sete is struggling to keep operating after an accusation of bribery this month by a former executive delayed the disbursement of a loan from Brazil’s development bank, four people with direct knowledge of the situation said in February. They asked not to be named because the matter isn’t public.

“It’s one big mess,” Kristian Diesen, an analyst at Pareto Securities AS, said by phone from Oslo. “Companies with assets or contracts in place are seeing increasing risk to their current backlog.”

In addition to Rolls-Royce thrusters and GE’s contract to integrate the electric-control systems, EAS had planned to buy steel from Usinas Siderurgicas de Minas Gerais SA and use a drilling package from National Oilwell Varco Inc. EAS won the contract to build seven of 29 drillships that Sete Brasil planned to lease to Petrobras to develop massive deep-water oil deposits off the coast of Brazil.

Usiminas in an e-mail declined to comment on its contract with EAS. National Oilwell didn’t respond to a request for comment.

$600 Million

GE said in a statement in 2013 it would supply $600 million worth of parts for 22 of the 29 vessels to EAS and three other shipyards. An outside Brazilian press agency for GE said yesterday in an e-mail that contracts already signed are being “honored and executed.”

“The situation in Brazil creates some uncertainty, and right now it’s a matter of wait and see,” said Anette Bonnevie Wollebaek, a spokeswoman for London-based Rolls-Royce.

“We haven’t received a formal cancellation or postponement of any contracts for now,” she said by telephone from Aalesund, Norway. “We’re still committed to delivering on the agreement we have with our clients.”

Legal Measures

Rio de Janeiro-based Sete said it’s pursuing legal measures against EAS in an e-mail this week, without disclosing the reason behind EAS’s cancellation. Shipbuilding industry association Sinaval said in January that Sete had missed payments to several shipyards and declined to comment when reached this week about EAS’s decision. Numerous phone calls to EAS weren’t answered.

Should Rolls-Royce’s contract with EAS be canceled, it could represent an estimated loss of 5 million pounds to 25 million pounds ($7.75 million to $39 million), said Thomas Picherit, a Paris-based analyst at AlphaValue SAS.

While the situation could also force Rolls-Royce to write down the value of a 22 million-pound facility it built in Rio de Janeiro state, neither the contract cancellation nor the provisions would represent a “material” loss to the company, said Edward Stacey, an analyst at Espirito Santo Investment Bank.

“This is a company that makes 2 billion pounds a year of operating profit,” Stacey said in a telephone interview from London.

GDP Impact

If Sete’s troubles worsen, there’s a risk other shipyards with contracts could also pull out, said Adriano Pires, head of the Rio de Janeiro-based energy and infrastructure consulting firm CBIE.

Founded after Petrobras made the Western Hemisphere’s biggest oil discovery in 30 years, Sete was a cornerstone of the government’s campaign to push companies to use locally made parts and equipment. Sete said on its website it planned to spend about $25.7 billion by 2020 to make deep-water drilling platforms, creating about 150,000 jobs.

“This could be the beginning of a process where other shipyards make the same decision as EAS,” Pires said in a telephone interview. “The impact is on GDP. Petrobras is one of Brazil’s biggest companies.”

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