U.S. refiner Citgo key in Venezuela’s power battle
The U.S. and dozens of other countries may have declared that Nicolas Maduro is no longer the legitimate president of Venezuela, but that has not loosened his grip on power. Maduro still controls the military, has the loyalty of the Supreme Court and has rendered the opposition-controlled National Assembly powerless by setting up a rival constitutional assembly.
But Maduro stands to lose one crucial lever of power: Houstonbased refining company Citgo, a wholly owned subsidiary of Venezuelan state-owned oil company Petroleos de Venezuela SA, known by its acronym PDVSA. Americans know Citgo for its familiar red triangle logo at its more than 5,000 branded gas stations and the iconic sign visible from Fenway Park in Boston. Venezuelans know it as one of their collapsing economy’s last lifelines.
The Trump administration is moving to help transfer its control to Juan Guaido, the National Assembly leader recognized by the U.S. and other countries as Venezuela’s legitimate president. Such a feat would give Guaido a slice of de facto power. Here’s a look at Citgo’s critical role in Venezuela’s power struggle:
Why is Citgo such a valuable asset for Venezuela?
U.S. refiners such as Citgo are among the few customers paying cash for Venezuelan crude. Oil shipments to Venezuela’s other big customers, China and Russia, are usually taken as repayment for billions of dollars in debt. So the cash from Citgo has become a lifeline over the past two years as Venezuela’s oil output has plummeted and oil prices have dropped from historic highs.
Until U.S. sanctions prohibited it, Citgo also repatriated profits to PDVSA. It also sent back fuel that Venezuela needs because of its deteriorating refining capabilities, as well as diluents that PDVSA needs to mix with Venezuela’s heaviest crude oil before it can be exported. But sanctions have prohibited those exports. Like other refiners, Citgo can now only import Venezuelan crude oil if it makes payments into blocked bank accounts, which almost certainly means the PDVSA will halt shipments to the U.S.
Maduro’s government also mortgaged Citgo to raise cash. Almost 50 percent of the company’s shares were put up as collateral for a $1.5 billion loan from the Russian state-controlled oil company Rosneft. The rest of the shares are collateral for PDVSA’s 2020 bond, the only bond Venezuela has continued to make payments on in a desperate effort to hang on to Citgo.
How do U.S. sanctions affect Citgo?
Citgo itself has become a little less dependent on PDVSA in one crucial way. Like other PDVSA customers, the refiner has been forced in recent months to look for alternative sources of crude because of Venezuela’s dramatic production decline, said Jennifer Rowland, an equity research analyst for Edward Jones. Still, the company faces a scramble to replace a complete loss of Venezuelan supply. Citgo had been processing up to 200,000 barrels a day of Venezuelan crude before the sanctions, or about 26 percent of the company’s total capacity.
Citgo itself is not a target of the sanctions. The Trump administration carved out an exemption for the PDVSA subsidiary so Americans can continue doing business with it.
Can Guaido pull off a leadership change at Citgo?
Guaido has said he will soon name a new board of directors for Citgo. Implementing the change, however, involves logistical hurdles. Pedro Burelli, a U.S.based consultant who was a PDVSA executive board member until 1998, said Guaido must first appoint new PDVSA leaders, who would then oversee the shareholder-voting process of selecting a Citgo board. But that new PDVSA leadership would not have real access to the bureaucracy and operations of the parent company, which Maduro controls.
What does Citgo have to say about this?
As a company, Citgo has offered limited insight about how it is coping with the power struggle. What little is known reflects the company’s uneasy identity as a Venezuelan-owned entity with deep American roots. Citgo’s current chief executive, Asdrubal Chavez, is a Maduro ally and cousin of his late predecessor, Hugo Chavez. He works out of the Bahamas because the U.S. has denied him a visa. Other members of Citgo’s executive teams are U.S. citizens who have worked at the company for decades.
What is Citgo’s history?
The company was founded in 1910 as City Services by American oilman Henry Doherty. Now a refining and marketing operation, Citgo employs 3,400 people and runs three refineries, in Louisiana, Texas and Illinois.
The company changed ownership several times before PDVSA fully bought it in 1990. At the time, relations between Venezuela and the U.S. were strong.
Later the government of Chavez, who died in 2013, put loyalists in key positions with the company.
An oil industry purge in 2017 included the arrest of former Citgo CEO Nelson Martinez, who died in prison last year. Six other Citgo executives were also arrested, including five who hold U.S. passports. Maduro’s government says the purge was intended to root out corruption. Critics say it was politically motivated.
What about the creditors targeting Citgo?
It’s unclear how much financial value Citgo would be to Guaido. The most immediate task will be keeping Citgo from falling into the hands of creditors owed billions of dollars by Venezuela and PDVSA.
Economists expect Maduro to stop paying to protect Citgo, including defaulting on the 2020 PDVSA bond. He also could stop honoring settlements with companies whose Venezuelan assets were expropriated under Chavez.
Russ Dallen, managing partner of brokerage firm Caracas Capital, said the Trump administration may seek to impose a “debt shield” for Venezuela similar to a measure the U.N. implemented for Iraq during the 2003 U.S.led invasion. But he said the measure would have to go through the Organization of American States because Maduro allies Russia and China have veto power on the U.N. Security Council. There is also the risk that Maduro will stop paying off the Rosneft loan collateralized by Citgo shares. The Trump administration has said it is exploring legal options to keep Citgo from falling into Russian hands.
Smoke rises from a refinery owned by Citgo, a subsidiary of PDVSA, the Venezuelan state owned oil company, on Feb. 1 in Lemont, Illinois.