RIO DE JANEIRO (AP) — Oil was to have been Brazil's "passport to the future," but the grand dreams tied to state company Petrobras have been brought to a screeching halt not only by falling crude prices, but by a crisis of its own making.
An expanding investigation into a kickback scandal at Brazil's largest company is rippling through the industry, suspending contracts, cutting off credit supplies and forcing layoffs at shipyards and other firms that had been gearing up for the anticipated oil boom.
Not long ago, President Dilma Rousseff had promised that exploration of rich, offshore fields would create hundreds of thousands of jobs and provide royalty income to finally improve Brazil's schools and health care system. But with no end to the investigation in sight, it's anyone's guess as to when Brazil will reap the rewards of its oil wealth.
"In 2008, everyone thought Brazil was becoming an oil superpower," said Adriano Pires, an energy consultant and former official at the government National Petroleum Agency. "Those big plans of expansion are all being reviewed."
Federal investigators say that over the last decade, construction firms paid about $800 million in bribes and other funds by overvaluing contracts with Petrobras and funneling some of the money to the ruling Workers' Party and its affiliates.
Eighty-seven people have been charged so far, including two former Petrobras directors. And on Friday night, the Supreme Court gave the attorney general permission to expand the investigation to dozens of politicians, including a former president and the heads of both houses of congress.
"It cast suspicion on all of Petrobras' contracts," said Claudio Pinho, a lawyer who specializes in the oil and gas industry. "It's paralyzing the whole operation of the biggest companies, which, in practice, halts all of the projects Petrobras needs to develop now."
The woes at Petrobras are contributing to a wider crisis hitting Brazil's economy, which observers say likely entered recession in 2014 and is forecast to shrink further this year.
Some analysts also fear Brazil's sovereign debt could lose its coveted investment-grade status, as the investigation spreads across vital industries and ensnares powerful politicians. That already is contributing to gridlock in congress, making it virtually impossible to pass economic reforms and austerity measures needed to stabilize Brazil's accounts.
Credit-rating agency Moody's Investors Service downgraded the company to junk status in February citing an "increasing concern about corruption investigations" and it's feared other rating agencies soon will do the same.
That essentially locks the company out of international credit markets, cutting off the investment money it needs to develop the offshore oil basins.
The problems at Petrobras, which controls 90 percent of an oil industry that employs 400,000 people, are creating a domino effect.
Suppliers under investigation are barred from signing any new deals with Petrobras. The limitation is especially crippling because, by law and depending on the project, the oil industry must use local suppliers for up to 65 percent of the equipment and services needed for its projects.
"None of those guys can go to the market and raise any money," said Evan Sponagle, a Rio de Janeiro-based consultant. "And obviously you need the supply chain in place or else how are you going to drill?"
Sete Brasil, a firm that became a poster child for Brazil's growing industry after it was set up by Petrobras in 2011, has run out of money to build drilling rigs. A deal to secure a lifesaving loan from the National Development Bank fell through after prosecutors released testimony by a former director who said the company accepted bribes in exchange for contracts. Now observers say the firm could go belly up.
The Atlantico Sul shipyard in northeastern Brazil canceled a deal last month to build seven rigs for Sete Brasil over lack of payment. It's expected to soon lay off more than 1,000 workers. The Enseada shipyard in Bahia state already has fired 3,000 employees due to Sete Brasil's problems.
Naval workers' unions fear plans to build 56 platforms will be canceled. The oil company also is telling two Houston-based contractors — Pacific Drilling and Diamond Offshore Drilling — and Britain's Seadrill it won't renew contracts it had for deep-water drilling rigs or ships.
Some say it's only the beginning. Companies caught up in the scheme face more than $1.5 billion in fines and restitution of public money siphoned off from Petrobras.
"Any expectations about new investment are off the table until people understand this situation," said Michelle Michot Foss, a foreign energy analyst at the University of Texas' Bureau of Economic Geology, based in Houston.
The scandal comes on top of the dive in global oil prices which has hampered expansion projects around the world. The double-punch is certain to derail Petrobras' goal to boost production to 5 million barrels a day by 2018 and become one of the world's top five oil companies.
Yet this week, Petrobras announced it would sell $13.7 billion worth of assets as it tries to improve its cash situation and relieve its $135 billion debt.
Experts say two things must happen quickly for Petrobras to recover: Its new leadership, put in place after the mass resignation of its top executives in February, must convince investors it will root out corruption; and the government needs to relax local-contractor quotas, something ordinary Brazilians greatly oppose. At present, neither scenario looks possible, and the best that could happen would be for oil prices to rise, making offshore development attractive for potential partners.
Despite the gloom and doom for Petrobras, there is a silver lining, says Joao Augusto de Castro Neves, Latin America director with U.S.-based Eurasia Group.
"At the end of the day," he said, "Petrobras will leave this crisis with stronger governance and (become) less state-centric in terms of developing these fields."
Adriana Gomez Licon on Twitter: www.twitter.com/agomezlicon