Petrobras" problems may not yet be over Maria das Graças Foster was appointed chief executive of Petrobras in January 2012 A tax ruling against Petrobras this week is just the latest in a string of bad news in what has become an annus horribilis for the Brazilian national oil major. The court decision, in which South America's largest oil company was ordered to pay R$4.8bn ($2.4bn) taxes dating from a decade ago on overseas operations, follows a year characterised by falling production, exchange rate losses and government interference, which has sent its shares plunging. From being the darling of investors just five years ago, after making the largest offshore oil discovery in decades, Petrobras today is reeling from the ignominy of reporting its first quarterly loss in 13 years in the second quarter and disappointing investors again in the third. "On yet another occasion, we have seen weak production, higher costs and a continuing deficit in the balance between exports and imports," said Erick Scott, an analyst with SLW Corretora, of the third-quarter results. The role of market cripple is not one that sits naturally with Petrobras, a group credited in Brazil and the international oil industry for its engineering prowess, particularly in the challenging area of deepwater exploration and production. The company discovered "pre-salt" deposits in 2007 off the coast of southeastern Brazil. These are thought to contain reserves similar to those of the North Sea, buried under the sea floor beneath a 2km layer of salt. To exploit them, Petrobras has embarked on what is believed to be the largest corporate capital expenditure programme in the world, valued at about $237bn, which has led the major global oil services industry operators to flock to Brazil. Yet, in spite of this, Petrobras has struggled. The government appointed Maria das Graças Silva Foster, a long-time company veteran and an engineer, as chief executive in January, in an attempt to refocus the group on efficiency, but its financial performance has continued to slide. Net profit in the three months to the end of September slumped 12 per cent compared with a year earlier, to $5.57bn, or down 52 per cent in the first nine months of this year. Petrobras" share price, meanwhile, has lost about 50 per cent of its value in the past three years, underperforming the benchmark Bovespa index. Part of the company's problem is that it is acting as "an arm of the government" rather than focusing on its own performance, said Walter de Vitto, an analyst at the Tendências consultancy. Government requirements for locally made parts in its oil equipment are slowing the company's capital expenditure programme and increasing its costs. Perhaps even more troublesome is an unofficial government policy of suppressing the price Petrobras charges for fuel from its refineries. This is designed to keep prices at the petrol pump low and thereby help curb inflation. But it means Petrobras, which is being forced to import oil at international prices to keep pace with a growing economy and lower domestic production, must sell the imported fuel at a loss on the local market. In an acknowledgment of the issue, the government allowed Petrobras to increase the price of petrol by 7.83 per cent and diesel by a total of almost 10 per cent, in changes that took effect during the third quarter. But these price increases did not go far enough. Almir Barbassa, finance director at Petrobras, said the company had envisaged raising prices 15 per cent this year. Our business plan forecasts adjustments larger than have occurred until now for this year. Therefore there exists room for [another increase]," Mr Barbassa said. Even if he gets his way, however, Petrobras" problems may not be over, at least until it can bring more of the big pre-salt fields and other new sources of production on line. Credit Suisse, in a report on the company's third-quarter results, said that its output in September was its lowest since April 2008. There was an implicit natural decline in production from existing wells of 11 per cent, while underlying lifting costs - the cost of extracting oil and gas - rose 17 per cent. Exploration and other costs also continued to climb. "The list is long," Credit Suisse said of the negatives stemming from the third quarter. It said the fourth quarter should show a temporary improvement but next year "is looking like déjà vu all over again." Against these strategic issues, the adverse tax ruling on Petrobras" overseas operations, which the company has pledged to challenge, seems trivial indeed. Yet for investors with an iron constitution, Petrobras may still prove a good long-term bet. After all, there are few companies in the world with a virtual monopoly over the oil reserves of a country the size of Brazil.