SINGAPORE (July 8): Singapore’s formerly thriving offshore oil and gas sector has received yet another rude jolt: The fallout from the multi-year bribery-for-contracts scandal in Brazil is not over.

In a pre-market announcement on July 3, Sembcorp Marine said the Brazilian federal police had conducted a search of the premises of its subsidiary Estaleiro Jurong Aracruz (EJA) in Brazil. Investors were spooked. SembMarine shares crashed from $1.54 to $1.41 on July 3, before recovering to close a cent higher at $1.42 on July 4. Some $250 million in market value was destroyed in these two days.

According to SembMarine’s announcement, the raid by the Brazilian police, the date of which has not been specified, was in relation to on-going investigations against EJA’s former consultant, Guilherme Esteves de Jesus. He was arrested on March 27, 2015. The announcement also named, for the first time, a SembMarine executive as part of the probe: Martin Cheah Kok Choon, former president of EJA.

News of the police raid in Brazil came just 12 days after SembMarine, in an unusual move, took a $2 billion loan from its parent company Sembcorp Industries. The companies said the loan would shore up SembMarine’s balance sheet to put it in a “better position” for the recovery in the sector.

KGI analyst Joel Ng observes that the $2 billion line was divided into two portions. The first, $1.5 billion at a rate of 3.55% a year, is to be used by SembMarine to retire a bond. The remaining $500 million, carrying a rate of swap offer rate plus 1.91% a year, is meant for working capital, which Ng believes is set aside in case of any fines that might arise from the Brazilian case.

In December 2017, SembMarine’s rigbuilding peer and fellow government linked company, Keppel Corp, paid a fine of US$422 million in a deferred prosecution agreement (DPA). Keppel had paid bribes in Brazil for contracts to build oil rigs used by Petroleo Brasileiro (PetroBras), the state-owned oil producer.

When news of that broke, SembMarine executives were tight-lipped, just as it has been since 2015, issuing statements in relation to the bribery allegations made against de Jesus. In a March 30, 2015 statement that was filed with the stock exchange, SembMarine said it was “unable to comment on the truth or otherwise of these allegations and its internal (legally privileged) investigations are continuing”.

The statement also said, “The company and the group have a strict anti-bribery poli­cy and do not condone any action that will result in the violation of any country’s anti-corruption laws. The company and the group also do not and will not tolerate any improper business conduct.”

One and a half years after Keppel’s DPA, industry watchers do not expect a quick resolution to SembMarine’s situation. “An early resolution is unlikely, given the scale of these investigations,” says Tania Chin, partner at Whithers KhattarWong.

According to Billy Huang, CEO of RHT Forensics & Disputes Advisory, a DPA, as was the case with Keppel, could take place. “It appears that it is too early for the authorities to arrive at this juncture, as investigations are still ongoing, and Sembcorp’s subsidiary’s role in the alleged bribery scandals has not been determined.”

Huang points out that Brazilian authorities took nearly three years to complete the investigations on Keppel and to settle the matter conclusively. Now, should SembMarine be found guilty of bribery as well, and should it agree to a settlement and pay a fine, the matter should be resolved in the same time it took for Keppel, or even sooner. This is because the Brazilian authorities already have prior experience dealing with such cases, says Huang.

Regardless, SembMarine is operating in a much-changed market. Owing to structural shifts in the global energy market, the price of crude oil has struggled to regain ground to the previous peak of more than US$100 a barrel. Spending throughout the entire oil production chain is now much more restrained. In short, it will be even more difficult for players such as Keppel and SembMarine to maintain the same share of business they had enjoyed.

As SembMarine moves ahead with the case, a key consideration for the company and its investors would be whether its ability to operate in resource-rich Brazil would be affected.

“Someone being found guilty, and punished, is not the end of the story,” warns Adrian Tan of TSMP Law Corp. “Arresting the executive is not a needle mover for the company, but corrupt or illegal activities for the company may have a large impact that will pique the concerns of investors.”