Tue, 07 Feb 2023

Venezuela: CITGO Breakup Looms with Protection End in Sight

venezuelanalysis
20 Jan 2023, 03:50 GMT+10

Merida, January 19, 2023 (venezuelanalysis.com) - Venezuela's most prized foreign asset has moved a step closer to being broken up and seized by creditors.

CITGO, the US-based subsidiary of Venezuelan state oil company PDVSA, is worth an estimated US $8 billion. With three refineries and a network of over four thousand gas stations stateside, it faces a number of threats as several corporations and bondholders look to claim shares as compensation for arbitration awards and defaulted debt.

On Tuesday, the US Treasury Department's Office of Foreign Assets Control (OFAC) issued general license 5J blocking transactions involving the PDVSA 2020 bond until April 20. Previous licenses had been issued for six months or an entire year, and the shorter term for the current one is seen by analysts as a signal that it will not be extended further.

The PDVSA 2020 bond is tied to CITGO as 50.1 percent of the company's shares were pledged as collateral. Though the debt instrument was prioritized by the Nicolas Maduro government, wide-reaching US sanctions made it impossible to continue fulfilling principal and interest payments.

The US government stepped in in late 2019 to block holders of the defaulted bond from seizing CITGO shares. The move and subsequent extensions were made to support the self-proclaimed "interim government" led by Juan Guaido which was recognized by the US and handed control of the US-based subsidiary.

Washington imposed punishing sanctions and seized Venezuelan assets as part of efforts to trigger regime change in the Caribbean country. Prior to the blockade, CITGO contributed over $1 billion a year in dividends to the nation's coffers.

With opposition parties ousting Guaido and dissolving the "interim government" in late December, the Biden administration could be inclined to no longer stand in the way of investors who are owed a reported combined $3.4 billion.

However, PDVSA 2020 bondholders are not the only ones closing in on CITGO. The firm likewise faces threats from corporations that have secured international arbitration awards against Venezuela.

In October, Delaware Judge Leonard Stark set in motion a court-mandated share auction process for CITGO's parent company, PDV Holding.

The legal case was driven by Canadian miner Crystallex as part of its efforts to collect a $1.4 billion sum awarded by the World Bank's International Center for Settlement of Investment Disputes (ICSID) in 2016 as compensation for the 2008 nationalization of its gold mine in eastern Venezuela. A reported $970 million are outstanding.

The sales proceedings are expected to last several months and will allow the highest bidder to buy a part or all of PDV Holding's shares.

The process was set in motion despite a US Treasury ban blocking the seizure of Venezuelan assets. Court-appointed "Special Master" Robert B. Pincus was tasked with securing an eventual license from the Treasury Department. According to specialized website Law360, Pincus is scheduled to meet with OFAC officials on January 19.

Crystallex had previous license requests denied by the Biden administration on political grounds. The firm had likewise complained of a possible disadvantage with respect to the PDVSA 2020 bondholders.

The short-term nature of license 5J might suggest that OFAC will be similarly inclined not to stand in the way of the Delaware court-mandated auction.

Additionally, it may encourage an out-of-court settlement if the different suitors look to align their respective timelines. Nevertheless, CITGO's management and ongoing legal cases face further uncertainty following the opposition turmoil that led to Guaido's recent ouster and replacement with a three-person board.

Crystallex is not the only corporation with sights set on CITGO to enforce an international arbitration award. Other claimants include glass firm Owens-Illinois (owed $500 million), Rusoro Mining ($967 million) as well as Koch Minerals and Koch Nitrogen ($387 million). All have expressed interest in collecting via Venezuela's subsidiary, and the latter two have applied to peg their claim to the Delaware proceedings.

Claimants need to prove in court that CITGO is an "alter ego" of the Venezuelan state so as to collect on debts via the company's shares.

ConocoPhillips also filed a motion to attach a $2 billion award granted by the International Chamber of Commerce (ICC) in 2018 for two former joint oil ventures in Venezuela. The South American nation still owes an alleged $1.3 billion of the total.

In 2019, the oil giant secured a separate $8.5 billion compensation, with over $1 billion in accrued interests, from ICSID for three oil projects nationalized by the Hugo Chavez government in 2007. In August, ConocoPhillips won a default ruling to enforce the award, despite ongoing Venezuelan efforts to overturn the ICSID ruling.

Guaido and his associates have drawn significant suspicions for their handling of legal proceedings, with court no-shows as well as accusations of conflicts of interest and striking under-the-table deals.

Last week, the Wall Street Journal reported that ConocoPhillips was engaged in talks with PDVSA to possibly sell Venezuelan oil cargoes in order to recoup the current debt. The Houston-based firm has a license to discuss debt settlement with the Venezuelan state oil firm. Neither ConocoPhillips nor PDVSA issued public comments on the alleged negotiations.

Though the US sanctions program heavily targeted the Venezuelan oil industry, the Biden administration has moved to reevaluate measures in the wake of the global energy crisis triggered by the Ukraine conflict.

In December, the White House granted an expanded sanctions waiver allowing Chevron to resume pumping and selling crude from its joint ventures in Venezuela. However, the license, like the ConocoPhillips proposal, aims to bolster US energy supplies while curtailing benefits to the Venezuelan government.

 

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Ricardo Vaz | source: venezuelanalysis

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