Venezuela fights to reclaim PDVSA and not lose its “crown jewel” subsidiary Citgo

RIO DE JANEIRO, BRAZIL – To begin conceiving a recovery from the economic and humanitarian crisis Venezuela is experiencing, it is necessary to assess the battle the country will have to fight abroad to retain its most precious asset: Citgo, the North American subsidiary of state-owned Petroleos de Venezuela (PDVSA).

In negotiations that began last Friday with the opposition, the Venezuelan government is claiming control of Citgo, in the dispute created by opposition leader Juan Guaidó who is recognized as interim president by over 50 countries.

The company faces threats from creditors on different fronts, and the hope is that a solution will be found to prevent the company from falling into the hands of third parties.

Despite the constraints under which it operates, Citgo on Monday posted a small profit in the second quarter of the year, its first since 2019, and continues to be the 8th largest refiner in the United States. The company’s recent history is a legal drama parallel to the political crisis that the South American country has been experiencing since 2014, when it went into economic recession.

In December 2015, the opposition won two-thirds of the Legislative Assembly, and a few months later in 2016, the government of President Nicolás Maduro decided to issue US$1.4 billion in bonds to refinance PDVSA’s debt, without Parliament’s approval. The government offered Citgo shares as collateral and Wall Street reacted with appetite by buying the papers.

The result of the 2015 election, recognized only by the Maduro government, raised expectations that a regime change was forthcoming in Venezuela, says economist and director of the organization Oil for Venezuela Francisco Rodriguez.

“In September 2016, the markets did not perceive Venezuela as a dictatorship, as they do today. They viewed it as an unpopular government that would very possibly exit through an electoral process,” says Rodríguez. “The feeling was, ‘This government’s days are numbered,'” he notes. So at that time, buying the bonds was not necessarily a backing for Maduro, but rather a gamble on change.

But that didn’t happen. The Venezuelan government convened a National Constituent Assembly in which the opposition did not participate. A day later, on July 31, 2017, the U.S. Treasury Department imposed sanctions on President Maduro, freezing all assets subject to U.S. jurisdiction.

In May 2018 presidential elections were held which Maduro won, but the results were ignored by the opposition and part of the international community amid allegations of fraud and lack of legitimacy. As a consequence, several countries imposed sanctions against 78 Venezuelans associated with Maduro, and in April the following year the United States extended these punitive measures.

This complicated bond payments, but the government continued to meet quarterly interest payments until late 2018.

It was at this point that Guaidó, then president of the Assembly, relied on the Constitution to declare himself “president in charge” of the country, a move that left Maduro on the ropes.

“The problem begins when the change from Maduro to Guaidó occurs,” explains Rodriguez. Donald Trump’s government decides to recognize Guaidó as president, which implies considering him the representative of Venezuelan state enterprises in the United States. Guaidó then set up Citgo’s board of directors to this end, and it is this board that is now faced with the company’s legal issues.

Venezuela’s economic crisis and sanctions limit Guaidó’s ability to refine Venezuelan oil at Citgo. It is also virtually impossible to make a profit on Citgo’s earnings, as sanctions include freezing accounts. In 2019, Maduro’s government found a way around the sanctions and began moving oil, cash, gold and other resources through Russian routes.

Guaidó appealed to a New York court and called for the cancellation of debt bonds, arguing that the issuance had been illegal, since congressional approval had not been requested. The judge in charge ruled against Guaidó, arguing that based on the laws of the city where the bonds were issued, the issuance was legal. This led Guaidó and the Citgo board of directors to the Court of Appeals.

“We are asking it to dig deep,” said Horacio Medina, Citgo’s chairman of the board of directors appointed by Guaidó, “because originally, both the bondholders and the Maduro government knew perfectly well that this was unconstitutional as it required the approval of the National Assembly. That’s where our litigation battle is focused.” In 2019, bondholders, including investment banks and international funds, were allowed to foreclose on 49% of Citgo’s shares to collect what they were owed.

To prevent Guaidó from losing Citgo, the U.S. government approved the temporary suspension of that license, to give the court time to settle the dispute. The suspension was renewed temporarily until October 21. Medina, who has referred to the U.S. affiliate as Venezuela’s “crown jewel,” was appointed chairman of the board in December after years as a member.

Failed negotiations

“We began a rapprochement with the bondholders to see if we could reach some kind of agreement, and so the months of August and September 2020 were spent in a sort of talks that cannot be called negotiations,” Medina says. “They were approaches, we listened to each other, and the conclusion we came to is that we are at diametrically opposite points. There was no chance of convergence,” he adds.

This means that the future of Citgo, and therefore of this source of revenue and foreign exchange that Venezuela so badly needs, is in the hands of the Court of Appeals, Medina explains. “There is no way to guess when a decision will be made, but from experience, it could happen by the end of this year or early next year,” Medina says.

But the Venezuelan bond drama is not the only one Citgo is facing. Two transnational companies, Conoco Phillips oil company and Crystallex mining company, are claiming rights to Citgo in U.S. courts in separate lawsuits.

Conoco Phillips won an international arbitration case in 2017 against the state of Venezuela for being wrongfully expropriated without compensation. For its part, Crystalex won a similar arbitration for an expropriation that occurred in 2008. Both companies claim to be partial owners of Citgo, as they consider the subsidiary to be an asset of the Venezuelan government. Conoco Phillips has petitioned for Citgo’s bankruptcy to be declared.

That is why a first meeting between the government and the opposition suddenly becomes crucial for Citgo. “If there is a change in the political model and there is a democratic Government in Venezuela, if there is some kind of possibility to balance the issue, to stabilize the country financially and politically, then there would be great chances to reach some kind of agreement with all these creditors,” Medina says.

Rodríguez believes that the Guaidó government, by having control of Citgo, has the ability to pay “a refinanced version of the debt” if creditors are willing to negotiate. Despite the crisis and sanctions, the subsidiary has made a profit in recent years from refining non-Venezuelan oil, Rodríguez says. “Citgo is a company with a revenue flow, with a value that exceeds the debt amount, with assets and deposits. I believe that reaching an agreement is possible.”

However, Medina is only partially optimistic: “It is very difficult for us to fully rescue Citgo. We are doing everything possible, analyzing all our options, because for us it is indispensable,” the company’s chairman added. Medina recalls a phrase said by General San Martin, liberator of Argentina: “When they told him that the cause of freedom was impossible, he replied that yes, it was impossible, but it was indispensable. I believe that here it seems impossible to save Citgo, but it is indispensable because Citgo is key to the recovery of Venezuela.”

Source: infobae