The Biggest Energy Crooks

It shakes the whole foundation of investing internationally.

By Michael McDonald,

It’s been a tough year for international oil investors in Brazil as Petrobras has come under extreme scrutiny for allegedly paying massive bribes to secure lucrative contracts. The scandal has demolished Petrobras’ stock price and led to heads rolling across its leadership offices (figurative speaking, of course).

Amazingly, the chair of the board of Petrobras during the period when the bribes allegedly took place is none other than Brazil’s President Dilma Rousseff. The scandal is such a big deal that it led to massive protests by hundreds of thousands of people across the country in recent months. Brazil’s Attorney General cleared Rousseff of wrongdoing in the case and she claims ignorance of the bribes, but the public is finding it increasingly difficult to believe that she was entirely unaware of a bribery scandal that was so brazenly widespread.

The scandal has completely eroded trust in both Petrobras and the Brazilian government. After all, if a company would offer bribes and a politician would go looking for them, what other questionable practices could each be involved in? Petrobras’ future may be bleaker than it has ever been, and the company has surely been hamstrung by the scandal with all thoughts of growth and efficiency taking a backseat to damage control.

As if the Brazilian scandal is not enough though, international investors now have a second scandal to gawk over. Recently, Nigeria announced that the state oil company stole billions it earned under the watch of former President Goodluck Jonathan. Corporate officials told the government that roughly half of the Nigerian National Petroleum Corporation’s income over the last three years had been stolen. Even for the dismal ethical track record of Nigeria’s oil industry, the news was shocking.

The earnings from the NNPC are supposed to be remitted back to the government, but instead a vast portion of earnings were used for illicit spending and corporate largesse. For a country that is supposed to be Africa’s answer to the BRICs and which is the most populous and richest nation on the continent, the news is disgraceful. The government under new President Muhammadu Buhari dissolved the NNPC’s board and installed a new one, but with corruption this endemic across the continent’s largest oil company, a new board by itself will not change much.

The larger point revealed by both the Nigerian and Brazilian scandals is the importance of good corporate governance. Modern corporations are so large, even in developing markets, that they become very hard to monitor or control. Shareholders in companies never actually see the cash a firm purports to earn.

They rarely ever have the opportunity to actually talk face to face with company management or inspect a firm’s operations. Instead, investors have to rely on financial reports, independent auditors, and third-party monitors like boards to advocate on their behalf. Scandals like the ones in Brazil and Nigeria undermine investor faith in the value of those efforts and hence undermine the foundation of the modern economy.

As bad as the Nigerian scandal is, the Brazilian scandal is arguably worse. Nigeria has a worse reputation for corruption than Brazil, a fact not lost on investors. It is therefore a little less surprising.

Brazil, on the other hand, was supposed to be an emerging global power, not only in oil production, but also in terms of its increasingly sophisticated economy. With economic stagnation, however, Brazil’s luster has worn off for investors.

To the extent that investors cannot trust corporations or governments in what are supposed to be the best emerging markets like Brazil, it calls into question the whole foundation of investing internationally. And that destruction of trust is the true crime in both scandals. By Michael McDonald,

As Petrobras’ troubles just get worse, Brazil suddenly sees the private sector. Read… Petrobras Scandal Balloons, Losses Pile Up, Forces Brazil’s Hand

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  8 comments for “The Biggest Energy Crooks

  1. hoop says:

    Corruption is everywhere. About 10 years ago in a northern European country there was a big scandal. The construction companies sat together before bidding on governmental contracts to build highways, ports, airport and bridge etc. All came because of the double books which were kept. The profits where spread among the big companies via jobs outside the country. The system was running for more than 30 years. Nobody went to jail and small fines were paid. The justice of the country in the end charged the man who brought everything to daylight with fraud. In Italia they are building since I believe 1970 a high way in the south, it’s still not finished. In Spain they build white elephant in the form of local airports. People invested in Greece and already received one haircut during the first or second bailout. In Cyprus they also got bailed in. In America we had Lehman, Bears Sterns and many others, who blow holes in private investors pensions in little village in Norway. Than we have Libor, Commodities, FX manipulation by the big banks (all first world managed banks) In Iceland we had corruption too.

    The only difference between the northern and southern corruptions is that a lot of the northern corruptions in legalized, not presented as such by the media or simply gnored or bought off by a small fine without admitting guilt. Or the crimes are so big that the crime is declared too big to be criminal prosecuted.

    I think the writer is missing the elephant in the room.


  2. Paulo says:

    re statement: “To the extent that investors cannot trust corporations or governments in what are supposed to be the best emerging markets like Brazil, it calls into question the whole foundation of investing internationally.”

    Come on, How many politicians in US start out modestly wealthy and end up millionaires? All of them? Even finger pointing Nancy Pelosi passed favouring legislation for Credit Card Companies while holding a large stake in VISA.

    The entire system is rigged, everywhere. Nigeria and Brazil are pointed at but everywhere else is worse, especially China.

    USA is no better.

  3. Petunia says:

    I remember when a hint of scandal was enough to close down a financial firm, Saloman and Drexel come to mind. Now you can steal $2B of customer funds, get fined $64M, and make the stockholders pay. You can’t make this stuff up.

    All this money is just stolen under the guise of being in the market. Madoff was stupid to confess. He should have said he lost all the money and no one would have known the difference. Such is the current state of the investment world.

  4. peter brown says:

    Independent auditors? what planet are you living on?

    • night-train says:

      What was the name of the big accounting firm that got caught up in the fraud back in the Enron, Worldcom, ect. era? This crap is like a broken record.

  5. Julian the Apostate says:

    I’m shocked, SHOCKED that there is corruption in Brazil and Nigeria! Round up the usual suspects!

  6. Paul says:

    At the risk of sounding like a street-corner soap-box preacher, the lack of moral hazard displayed by corporations and Wall St. / The City etc. has become so brazen and openly defiant of the law that I find it beyond belief that any sane person would trust their hard earned money with any “investment” these criminal minds could cook up.
    Outright theft and fraud are charged off with paltry fines in the single digit percentages of the total theft by the revolving door regulators who will be rewarded with lucrative positions in the very firms they (prosecute would be too harsh a term) wrist-slap.
    This makes the SEC & CFTC more like a Mafioso Don who wets his beak from the “earners” in the family.

    I suppose as long as you understand that you’re gambling in a fixed game and keep in mind that you may be the mark at the table, then you might be okay by taking a win here and there. Remember that there may not actually be a ‘there’ there at all and your stock is nothing but debt hidden by smoke and mirrors.

    I suppose that it has always been this way and I’m just another grumpy old fart who pretends that things were more sane in the good old days that never really existed.
    One thing I do know for certain is that I’m far more aware of the criminals that I was in the past.

  7. PL says:

    Western oil companies rely on corrupt leaders in weak resource rich countries so that they can rape them of their oil and other resources.

    What you are seeing here is nothing out of the ordinary — these billions are the rewards that go to those who have allowed western oil companies to get the deals to pump the oil and destroy the environment with impunity.

    Nothing new or unexpected here.

    This is the way the world works — and always will:

    – The luckiest, fittest, smartest, with the capability for ruthlessness survive – always have – always will

    – Resources are finite and therefore ownership is a zero sum game

    – The strong always take from the weak – if they do not then that is a sign of weakness and a competitor will take from the weak and will usurp the formerly strong dropping them into weakling status

    – Humans tend to group by clan or on a broader basis by nationality (strength in numbers bonded by culture) and they compete with others for resources

    – Competition always exist (I want it all!) but it becomes fiercer when resources are not sufficient to support competing clans or nations

    – Tribal societies understand these dynamics because they cannot go to the grocery store for their food – so they are intimately aware of the daily battle to feed themselves and the competition for scare land and resources

    – Modern affluent societies do not recognize this dynamic because for them resources are not scarce – they have more than enough.

    – One of the main reasons that resources are not scarce in affluent societies is because they won the battle of the fittest (I would argue that luck is the precursor to all other advantages – affluent societies did not get that way because they started out smarter — rather they were lucky – and they parlayed that luck into advances in technology… including better war machines)

    – As we have observed throughout history the strong always trample the weak. Always. History has always been a battle to take more in the zero sum game. The goal is to take all if possible (if you end up in the gutter eating grass the response has been – better you than me – because I know you’d do the same to me)

    – And history demonstrates that the weak – given the opportunity – would turn the tables on the strong in a heartbeat. If they could they would beat the strong into submission and leave them bleeding in the streets and starving. As we see empire after empire after empire gets overthrown and a new power takes over. Was the US happy to share with Russia and vice versa? What about France and England? Nope. They wanted it all.

    – Many of us (including me) in the cushy western world appear not to understand what a villager in Somalia does – that our cushy lives are only possible because our leaders have recognized that the world is not a fair place — Koobaya Syndrome has no place in this world — Koombaya will get you a bullet in the back — or a one way trip to the slum.

    – Religious movements have attempted to change the course of human nature — telling us to share and get along — they have failed 100% – as expected. By rights we should be living in communes — Jesus was a communist was he not? We all know that this would never work. Because we want more. We want it all.

    – But in spite of our hypocrisy, we still have this mythical belief that mankind is capable of good – that we make mistakes along the way (a few genocides here, a few there… in order to steal the resources of an entire content so we can live the lives we live) — ultimately we believe we are flawed but decent. We are not. Absolutely not.

    – But our leaders — who see through this matrix of bullshit — realize that our cushy lives are based on us getting as much of the zero sum game as possible. That if they gave in to this wishy washy Koombaya BS we would all be living like Somalians.

    – Of course they cannot tell us what I am explaining here — that we must act ruthlessly because if we don’t someone else will — and that will be the end of our cushy lives. Because we are ‘moral’ — we believe we are decent – that if we could all get along and share and sing Koombaya the world would be wonderful. We do not accept their evil premises.

    – So they must lie to us. They must use propaganda to get us onside when they commit their acts of ruthlessness.

    – They cannot say: we are going to invade Iraq to ensure their oil is available so as to keep BAU operating (BAU which is our platform for global domination). The masses would rise against that making things difficult for the PTB who are only trying their best to ensure the hypocrites have their cushy lives and 3 buck gas (and of course so that the PTB continue to be able to afford their caviar and champagne) …. Because they know if the hypocrites had to pay more or took at lifestyle hit – they’d be seriously pissed off (and nobody wants to be a Somalian)

    – Which raises the question — are we fools for attacking the PTB when they attempt to throw out Putin and put in a stooge who will be willing to screw the Russian people so that we can continue to live large? When we know full well that Putin would do the same to us — and if not him someone more ruthless would come along and we’d be Somalians.

    – Should we be protesting and making it more difficult for our leaders to make sure we get to continue to lead our cushy lives? Or should we be following the example of the Spartans

    – In a nutshell are our interests as part of the western culture not completely in line with those of our leaders – i.e. if they fail we fail – if they succeed we succeed.

    – Lee Kuan Yew is famous for saying ‘yes I will eat very well but if I do so will you’ Why bite the hand that whips the weak to make sure you eat well…. If you bite it too hard it cannot whip the weak — making you the weak — meaning you get to feel the whip….

    – Nation… clan … individual…. The zero sum game plays out amongst nations first … but as resources become more scarce the battle comes closer to home with clans battling for what remains…. Eventually it is brother against brother ….

    – As the PTB run out of outsiders to whip and rob…. They turn on their own…. As we are seeing they have no problem with destroying the middle class because it means more for them… and when the weak rise against them they have no problem at all deploying the violent tactics that they have used against the weak across the world who have attempted to resist them

    – Eventually of course they will turn against each other…. Henry Kissinger and Maddy Albright bashing each other over the head with hammers fighting over a can of spam – how precious!

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