Sept. 27–When Petróleos de Venezuela became the sole owner of Citgo Petroleum in 1990, the state-owned oil company known as PDVSA was among the largest and most profitable energy companies in the world, the pride of a stable, longstanding democracy. With the first Gulf War looming, PDVSA touted itself as reliable supplier of oil amid the Middle East’s turmoil, ramping up crude production to meet demand as oil embargoes on Iraq and Kuwait tightened global inventories.
Nearly three decades later, Venezuela and PDVSA are in shambles, their oil production and revenues fast declining amid corruption and mismanagement that began during the socialist regime of the late Hugo Chávez. The future of Citgo, meanwhile, hangs in the balance as international creditors maneuver to grab PDVSA assets — perhaps none more valuable than the Houston refiner — to recover losses.
At stake is not only the survival of Citgo, but also some 4,000 jobs nationwide, including 800 in Houston, where state and local governments provided a $20-million-dollar package of incentives and low-interest loans to lure the company here from Oklahoma in 2004. Ultimately, analysts expect Citgo and its three U.S. refineries to be sold — possibly in pieces — to satisfy the billions of dollars in claims against PDVSA and the government of Venezuela.
“Venezuela will likely lose control of Citgo,” said Francisco Rodriguez, chief economist for New York investment bank Torino Capital. “The question is whether it’s going to happen now.”
Venezuela is in the midst of a political and economic crisis. Food, medicine and other necessities are in short supply and inflation is rampant, measured in the thousands of percent.
For PDVSA and Venezuela, the loss of Citgo would likely accelerate the downward spiral. Even as U.S. sanctions on Venezuela prevent Citgo from repatriating its profits, the Houston company remains a guaranteed buyer of Venezuelan heavy crude as refiners, including Phillips 66 of Houston, and Marathon Petroleum of Findlay, Ohio, scale back imports.
The United States also remains PDVSA’s largest export destination. Without Citgo, PDVSA’s already-restricted access to the American market would become more limited, analysts said, further undermining efforts to keep PDVSA solvent and encourage foreign investment in Venezuela’s oil-rich Orinoco region.
“PDVSA was one of the top oil companies in the world,” said Julián Cárdenas García, a professor who studies international oil and gas transactions at University of Houston’s law school. “This situation was unthinkable.”
The developments that have put Citgo at risk began more than a decade ago, when the Chavez government nationalized the oil and mining holdings of foreign companies. That led a number of companies, such as the Houston oil producer ConocoPhillips, to challenge the takings in arbitration proceedings sanctioned by contractual agreements and international conventions.
Venezuela, which sits atop the world’s largest proven oil reserves, was then prospering as global oil prices raced toward $150 barrel and Chavez used that money to fund generous social benefits and support friendly regimes in Cuba and other countries. Oil prices plunged after the 2008 global financial crisis, but recovered quickly, soon cresting above $100 a barrel again.
Chavez died in 2013, succeeded by his protege, Nicolas Maduro, who continued Chavez’s policies.
Venezuela devolved into political and economic crises following the collapse of oil prices in 2014, which made it impossible for the government to pay for Chavez’s social programs, service its debts and invest in the oil industry. As the economy collapsed, hundreds of thousands of people fled the country amid rampant violence and widespread shortages.
The Venezuelan government and PDVSA owe billions of dollars as part of more than a dozen arbitration disputes related to the country’s seizing of foreign assets under Chavez. Houston oil and gas producer ConocoPhillips, for example, last month reached a $2 billion settlement with PDVSA as compensation for the 2007 seizure of two of ConocoPhillips’ joint ventures.
ConocoPhillips is also seeking compensation from the government of Venezuela through arbitration pending before an arm of the World Bank. The award, expected to be determined this year, could be as high as $4.5 billion, analysts said, a tall order for a cash-strapped government.
“The cupboard is sort of bare as far as Venezuela’s economic prowess,” said Russ Dallen, CEO of investment bank Caracas Capital Markets. “There is a huge amount of judgment coming down the line, and they don’t have the resources to pay.”
Citgo was put in the limelight by a case that centers on Crystallex, a small mining company that has for years sought compensation for a gold mine seized by the Venezuelan government in 2011 The company in 2016 won a $1.2 billion arbitration award against Venezuela, plus roughly $200 million in interest. The company then turned to U.S. courts to enforce the award.
A federal judge in Delaware ruled last month that Venezuela’s tight control of PDVSA rendered the company the “alter ego” of the government — in other words, the two entities are one in the same. The assets of one, therefore, could be used to pay the debts of the other, the judge ruled.
“Alter ego is a hard case to prove, but if there’s a place you can prove it, it’s Venezuela,” said Rodriguez of Torino Capital.
That opened the door for Crystallex to seize PDVSA’s shares in Citgo’s American holding company. Other companies seeking compensation from Venezuela also are expected to target Citgo, setting off a scramble for its assets, which include refineries in Corpus Christi, Lake Charles, La. and Illinois. The company also has 5,500 branded gas stations across the nation, including about 160 in metropolitan Houston, as well as several pipelines and storage terminals.
PDVSA has appealed the Crystallex ruling, but the lower court ordered the shares of Citgo’s U.S. holding company to to be sold unless Venezuela posts a bond for the full amount owed to Crystallex.
Citgo has attempted to intervene in the case, arguing that proceeding with such a sale during the appeals process could cause “irreparable damage” to the company’s operations. The refiner said in a statement that it will continue to participate in the case to protect its assets and operations and ensure “business continuity.”
PDVSA could not be reached for comment.
In 2014, in need of cash as oil priced began to plunge, PDVSA put Citgo up for sale. PDVSA, which ultimately changed its mind, received interest from about 20 potential buyers, Crystallex said in a court filing, and reportedly sought as much as s $10 billion for the refiner.
Crystallex said it believes those buyers are still interested and that an additional 10 to 20 might appear to participate in an auction, the proceeds of which would allow Crystallex to recoup its arbitration award. No companies have publicly expressed interest in acquiring Citgo, but analysts say it could appeal to a number of potential buyers, including the San Antonio refiner Valero Energy, the nation’s largest importer of Venezuelan heavy crude.
Crystallex, however, is not necessarily the first in line for payment. Just over 50 percent of shares in Citgo’s U.S. parent company are pledged as collateral on PDVSA’s 2020 bonds, worth $2.5 billion. The rest of the stock is collateral for a $1.5 billion loan from the Russian oil giant Rosneft.
Just how much Citgo is worth remains a source of speculation. Several analysts have pegged its value between roughly $4 billion and $8 billion, excluding debt.
What happens next for Citgo is anyone’s guess. Though the Crystallex ruling faces an appeal, some analysts say it could force Citgo’s U.S. parent companies into bankruptcy court. Others have speculated that Crystallex could reach a settlement with the Venezuelan government, forestalling a takeover of Citgo.
But analysts say it’s only a matter of time before PDVSA loses Citgo as dozens of creditors fight over Venezuela’s dwindling assets. The refiner, then, would change hands and rest its fate with a new owner — just as it did nearly 30 years ago.
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