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Citgo’s future hangs in the balance

Rival Venezuelan regimes’ hopes of holding onto US firm look bleaker

Bankrupt Canadian mining firm Crystallex has received permission from a US federal court to pursue shares in US refiner Citgo, which is currently controlled by the US-recognised Juan Guaido administration that challenges President Nicolas Maduro for leadership of the troubled Latin American country.

Guaido had asked for a 45-day extension for a so-called ‘hearing en banc.’ A panel of judges would have re-examined a July ruling by the US court of appeals for the third circuit that allowed Crystallex to go after Citgo assets. But the administration failed to file any petition, prompting the court to lift the stay. Crystallex will still need a licence from the US Treasury before it can start its pursuit of the assets.

Gold tussle 

The Crystallex dispute centres on the nationalisation of gold deposits. Assets owned by Canadian firm within Venezuela’s Imataca National Forest Reserve were seized during the previous Hugo Chavez administration. The company filed an arbitration claim for lost investment and, in 2017, a Delaware court ordered Pdvsa to compensate the Canadian company $1.4bn—a ruling Pdvsa, which remains under Maduro control, has been appealing ever since.

The July court decision coming into effect could also pave the way for other claimants of compensation against Venezuela. In March, the World Bank ruled that US independent ConocoPhillips must be paid $8.75bn for appropriated oil projects. The previous year, the International Chamber of Commerce awarded ConocoPhillips $2bn for other nationalised oil assets. ConocoPhillips barricaded Pdvsa-owned facilities in the Caribbean until a deal for the former amount was settled.

“The most likely scenario, barring intervention from the US government, is claimants will begin seizing control of Citgo,” says Muhammed Ghulam, senior research associate at US bank Raymond James. “If that happens, there will be a struggle between the different claimants to get as much as possible.”

But the overall value of Citgo, previous use of shares in the company as debt collateral and the US view on the sustainability of any post-Maduro Venezuelan government all complicate the issue. “With large Russian and Canadian claims on Citgo, I am not sure there is much left for anyone else to go after,” says Jennifer Rowland, senior analyst at investment firm Edward Jones.

“The most likely scenario ... is claimants will begin seizing control of Citgo,” Ghulam, Raymond James

Holders of Pdvsa’s 2020 bond and Russia’s Rosneft may be first in the queue to assert their claims on Citgo. The $3.4bn bond has 50.1pc of Citgo’s shares used as collateral. The remaining 49.9pc of the firm was offered as security to ensure financing from Rosneft.

President Maduro has been blocked from making payments on the 2020 bond since US sanctions were imposed. In May, the opposition-controlled National Assembly, officially recognised as the legitimate government by Washington, paid out $71mn in interest to avoid bondholders seizing Citgo. The opposition now has until 27 October to find another $913mn or again risk losing the US refiner. 

“Citgo is a lifeline for the [Guaido] government and we have seen them continue to make payments on the 2020 bonds, which are the only Venezuelan bonds not in default,” says Rowland. “They do not want to lose the asset by seeing it fall under creditor control.”

Solutions

One potential option for the Guaido government would be to try to renegotiate the debt. “The current arithmetic does not work, it needs to be restructured,” says Steve Hanke, professor of applied economics at Johns Hopkins University and a previous chief economic advisor to the former Venezuelan President Raphael Caldera.  “They have to renegotiate, and they will, but debt restructuring can take time.”   

Guaido has repeatedly pleaded with the US to safeguard Citgo and prevent a sell-off. Attempts to oust Maduro from power appear to have stalled after a failed coup attempt in April, but Citgo remains the most valuable foreign asset the country possesses and could be crucial to any post-sanctions recovery for Venezuela’s oil industry, the country’s bellwether economic sector. The US refiner has three refineries on the Gulf coast and 765,000bl/d in combined throughput capacity.

Any attempt by Rosneft to assert its claim for a share of Pdvsa’s assets in the US would be unlikely to go smoothly. “A sale would be messy, particularly with Rosneft involved,” says Hanke. “Politically, the US would try to block any sale.”  

Such complexity and political ramifications may make it inevitable that the case returns to the courts. “The Crystallex situation is certainly a setback for the Venezuelan opposition to hold onto Citgo, but we will have to see how this plays out,” says Rowland. “I think bankruptcy for Pdvsa would be one option on the table, but we will have to have to see if Trump intervenes to help Guaido’s government.”

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