Houston Chronicle – by Mihir Zaveri, Susan Carroll and Ben Tavener

HOUSTON/SÃO PAULO — Sandwiched between U.S. and Texas flags, the Brazilian banner waves outside a set of discolored tanks and pipes at the site of a Pasadena refinery. A sign marked “PRSI” – for Pasadena Refining System Inc. – hangs over chain link fence with razor wire that surrounds the compound that dates back nearly a century.

From her porch, Hilda Perez and neighbor Lorie Soliz can see that refinery across a grassy field and train tracks – its glowing flares and sulfurous fumes are familiar. Both friends remember four years ago when an explosion there rocked the neighborhood and a giant flame rose into the sky. “There’s always something going on over there,” said Soliz, who has lived in the neighborhood since 1992.

But they didn’t know that their hometown refinery – owned by Brazilian state-run oil company Petrobras – has become a flashpoint in an explosive political scandal abroad.

Brazilian officials are investigating allegations that Petroleo Brasileiro S.A. – Petrobras – overpaid hundreds of millions of dollars for the Pasadena refinery and funneled money into a massive kickback scheme that’s led to dozens of convictions and arrests and fueled calls for the impeachment of the country’s President Dilma Rousseff, who chaired the company until 2010.

One of prosecutors’ first major discoveries in their ongoing investigation was that Petrobras overpaid in its purchase of Pasadena Refining Systems Inc. in a series of transactions dating back to 2006.

Petrobras, Brazil’s largest company, paid about $1.2 billion for the nearly century-old refinery complex – almost 30 times the amount the Belgian company Astra Oil purchased it for in 2005, according to Brazilian prosecutors and court records. Petrobras itself is one of the world’s largest refiners. The Pasadena refinery on Red Bluff Road is Petrobras’ only U.S. refinery – with a production of more than 100,000 barrels per day and more than 500 contract and permanent employees.

One former executive has admitted to being offered a $1.5 million bribe to allow the Pasadena deal to go through, records show, and Brazilian prosecutors are investigating whether politicians also received kickbacks from the purchase.

“We were absolutely dumbfounded, not to mention extremely concerned, by what we found,” Marinus de Vries Marsico, a prosecutor at Brazil’s Federal Accounts Court said of the Pasadena deal in an interview with the Houston Chronicle. “There were such flagrant, indefensible irregularities that it was easy to see what a catastrophic deal it was.”

Little attention here

He and other Brazilian investigators say Petrobras contracts worldwide were systematically overinflated by corrupt former executives and a “cartel” of construction companies that skimmed off money for themselves and paid off politicians, lobbyists and money launderers.

In corporate filings and news statements, Petrobras spokesmen claim the company is a victim. In an April 2015 filing with the U.S. Securities and Exchange Commission, Petroleo Brasileiro S.A. estimates that the company overpaid more than $2.5 billion in “capitalized costs” for “the acquisition of property, plant and equipment in prior years.” Petrobras states in the filing the money was used to fund “improper” payments to political parties, public officials, contractors, former Petrobras employees and “other individuals involved in the payment scheme.”

Petrobras officials did not respond to requests for comment for this story.

Petrobras, which has a U.S. subsidiary called Petrobras America Inc., reported in the April 2015 filing that it was subpoenaed by the U.S. Securities and Exchange Commission in November 2014, and is cooperating with the agency’s request. It’s unclear from Petrobras’ disclosure whether the SEC probe specifically focuses on the Pasadena deal or how the refinery’s operations could be impacted. SEC officials declined comment.

The revelations have seized the public’s attention and generated massive protests in Brazil. But the Texas refinery’s role in the scandal has gotten scant attention back in Pasadena.

“I’ve never heard anything about” it, said Pasadena Councilman Ornaldo Ybarra, whose district encompasses the area around the refinery. “From our perspective at the local level, there hasn’t been any issue.”

Value of facility

Baltimore-based Crown Central Petroleum erected the refinery in 1920 in what was then a rural community covered by strawberry fields.

“Crown was a major employer as Pasadena transitioned from its agricultural economy to industrial,” said Pasadena resident C. David Pomeroy Jr., a local historian.

Crown furnished the city with its first firefighting equipment and employed enlisted men waiting to deploy during World War II. Local residents – including Pomeroy’s father – found work at the refinery as valve hands, maintenance workers and engineers. But later the refinery became the site of a bitter labor dispute that included a yearslong lockout. In 1998 it paid a $1 million fine for air quality violations – then a Texas record.

In January 2005, Belgian group Astra Transcor purchased the refinery for $42.5 million and later reached out to Petrobras about a partnership, Brazilian court records show.

That year, a Texas-based consulting firm hired by Petrobras assessed the refinery’s value at $126 million. But Petrobras then did its own estimate of the refinery’s value and pegged it at $745 million. “Petrobras then adopted this result as the basis for the offers it presented” to Astra, Brazilian court records show.

Petrobras initially paid about $431 million for its 50 percent stake in the refinery and in a trading company that would hold the right to sell the refinery’s products, according to the Brazilian court records.

Petrobras America Inc. partnered with Astra Oil Trading NV, and two other interrelated companies – Astra GP Inc. and Astra Tradeco LP LLC – in the deal, according to a U.S. federal court records.

But the partnership soon turned sour.

‘High level of corruption’

To settle the contract dispute, Astra officials went first to an arbitration panel and then to federal court to invoke contract rights to try to force Petrobras companies to buy them out, U.S. federal court records show. The parties fought over what Houston-based U.S. District Judge Ewing Werlein Jr. described as “strategic vision” in a related 2010 U.S. federal court record. One Astra executive sent a 750-page email detailing “significant problems” with the joint venture.

Petrobras eventually agreed out of court to pay another $820 million, Brazilian court records say.

That meant Petrobras paid about $1.2 billion to Astra for the Pasadena refinery, including its initial investment and the settlement payments, according to Brazilian court records.

Brazilian auditors later concluded that a handful of former Petrobras executives were responsible for the overpayment in Pasadena and ordered that $792 million be returned to Petrobras.

Marsico said the Brazilian criminal probe of the Pasadena refinery deal began in 2013, and offered “a first indication of the high level of corruption in Petrobras’ activities.”

“The Pasadena deal was an affront to Brazil; it was a joke that damaged Brazil’s reputation for being able to do business in a serious, responsible way,” Marsico said.

Paulo Roberto Costa, who was Petrobras’s director of refining from 2004 to 2012, told investigators he had reservations about the Pasadena purchase, describing the refinery as “very old,” and in need of serious upgrades. Costa said last fall that he was offered $1.5 million to “not to cause problems” at an approval meeting of that deal, according to a statement Costa made to Brazilian officials as part of a plea bargain.

Marsico said he and his colleagues will investigate the link between Petrobras and Astra, the company on the other side of the “pernicious” Pasadena sale, to see if anyone else should be held accountable.

Astra officials did not respond to emails and calls to their attorneys and to their offices in Houston.

In Brazil, about 500 people and companies are under investigation for their alleged involvement in the Petrobras kickback scheme, known as “Operação Lava Jato,” or “Operation Car Wash.” To date, 43 people have been convicted and sentenced to jail terms and fines over offenses ranging from corruption and money laundering to criminal association, and investigations continue. This month allegations surfaced that a Brazilian senator who was not previously under suspicion received a kickback of at least $1 million in connection with the Pasadena refinery purchase.

“The information doesn’t stop coming,” said Monica Arruda De Almeida, an adjunct professor at the Center of Latin American Studies at Georgetown University. “The speed with which things are still evolving is just amazing.”

In the context of global corporate scandals, the Petrobras case is “huge,” said Tom Fox, a Houston lawyer who specializes in corporate compliance with the Foreign Corrupt Practices Act. “It’s huger than huge,” he said.

Environmental issues

The dozens of convictions in Brazil so far in the probe include lobbyists, money changers, and executives both from Petrobras and construction industry giants. Former Petrobras director Renato Duque has received the largest individual jail sentence so far: 20 years and 8 months.

There have been no prosecutions to date in the U.S.

Under Petrobras ownership, the Pasadena refinery has had its share of environmental problems – including the 2011 explosion. In 2012, Harris County received a $750,000 settlement from the refinery for alleged environmental violations, including failing to control emissions, records show. Federal workplace safety officials have fined the company $56,500 since 2010.

Still, Pasadena Councilman Ybarra has seen no signs of major flaws. He said he views Petrobras as a good corporate neighbor that contributes to charitable causes.