U.S. re­finer Citgo key in Venezuela’s power bat­tle

The Atlanta Journal-Constitution - - NATION & WORLD - By Alexan­dra Ol­son

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.

SCOTT OL­SON / GETTY IM­AGES

Smoke rises from a re­fin­ery owned by Citgo, a sub­sidiary of PDVSA, the Venezue­lan state owned oil com­pany, on Feb. 1 in Le­mont, Illi­nois.

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