[RIO DE JANEIRO] Buried off the coast of Brazil, beneath miles of seawater, rock and salt, lie vast oil reserves - at least 50 billion barrels - that were supposed to yield untold riches for this nation.
But, as so often happens in Brazil, the early promise of this sprawling prehistoric geological formation known as the pre-salt is giving way to gloom. Eight years after the reserves were discovered, government intervention, corruption and mismanagement at the state-run oil giant Petroleo Brasileiro have cast doubt over Brazil's ability to capture and leverage its oil wealth to lift its entire economy.
The scandal has coincided with a jarring decline in world oil prices and prompted outrage and national soul-searching. Petrobras embodied not just the swagger of Brazil's oil industry but the can-do spirit of the nation's quest to be a major player on the world energy stage.
For decades, official government policy was to load up Petrobras with government-friendly management and enact Petrobras-friendly policies to fast-track its oil development efforts. In return, Petrobras's oil wealth has been ladled out to states and cities to pay for billions in social and economic- development programs.
But those policies are being questioned as never before. Spending on programs like fuel subsidies for the masses has sent Petrobras's debt soaring to record levels and government- appointed management has been cast as negligent overseers in perhaps the biggest and most expensive corruption scandal to ever rock Brazil.
"The word for it is chaos," said Vandre Guimaraes, development secretary for the city of Macae, which Petrobras uses as a base for its offshore operations. Oil projects have been mothballed and jobs have disappeared -- at least 3,000 have vanished this year, he said.
President Dilma Rousseff is struggling to contain the damage at the oil giant she oversaw and championed. She has shaken up company management, replacing her friend and hand- picked chief executive officer Maria das Gracas Foster and several other executives.
So, too, is Petrobras. Its US$135 billion in debt, higher than the nation of Denmark's, its expensive overhead and losses due to the bribery scandal are forcing it to reduce investments and put US$13.7 billion in assets up for sale at a time when oil prices have tanked. On Wednesday its board will vote on financial results that have been delayed since January.
Petrobras's stock has rallied in recently - a gain of 40 per cent in the past month - on signs that it will resolve the impasse over publishing its financial results and assurances of reform. But the scandal isn't going away and could be a drag on company operations for years to come. Critics say Ms Rousseff hasn't done nearly enough to break the government chains that many see as Petrobras's main problem.
"The current situation is the exclusive fault of government interference, from fuel subsidies to political appointments that led to the corruption scandal," said Pedro Zalan, a consultant who worked for three decades at Petrobras. "If it wasn't for government interference, the company wouldn't need to sell valuable assets during a time of low oil prices."
Some politicians and business leaders are urging Ms Rousseff to liberalise policies that have given Petrobras a virtual monopoly over development of the pre-salt, a formation that sprawls beneath the Continental Shelf about 150 miles from Brazil's beaches.
As it stands now, foreign oil companies can participate in pre-salt projects - but only with Petrobras as their operating partner. They also have to procure some 65 per cent of equipment and services domestically.
Today, some former advocates of these statist policies are reversing field. The Brazilian Democratic Movement Party, a member of Rousseff's ruling coalition that backed a 2010 law enshrining Petrobras's pre-salt advantage, now says letting outside companies compete could help spur economic growth and job development.
"When you make a mistake, you have to have the humility to take a step back and return to a model that proved to be efficient and beneficial for the country," said Leonardo Picciani, the lower house leader of the party, known as PMDB.
Rousseff, while agreeing in a March 31 interview that "drastic measures" are needed to turn Petrobras around, still sees no need to change the local-content rules and pre-salt ownership requirement at the core of the oil strategy.
The ownership requirement is awkward for oil companies and has not produced the desired results. Any consortium that bids against Petrobras for pre-salt acreage and wins would then need to hand control of day-to-day operations to the state-run producer along with a 30 percent stake after the bidding showdown. This hasn't been tried yet.
Petrobras, for its part, says it's on the mend. New CEO Aldemir Bendine has quickly moved to secure much needed financing, closing four deals worth 9.5 billion reais (US$3.1 billion) in loans from Brazilian banks and signing a US$3 billion offshore platform deal. That follows an April 1 finance deal with the China Development Bank for US$3.5 billion, the first part of an accord to be implemented this year and in 2016.
Meanwhile, pre-salt yields have surpassed Petrobras's own predictions, with the company now producing about three times more than it projected in 2010.
"The pre-salt oil is economically viable even with the current lower prices," the company said in an e-mailed reply to questions. "Petrobras and its partners have full confidence in the production profitability of that exploratory frontier."