In what would be its largest pullback from the U.S. market, Venezuelan state oil company Petróleos de Venezuela (Pdvsa) said late last month that it was entertaining offers to sell its U.S. subsidiary Citgo. The move to sell is part of an effort to raise cash for projects in Venezuela, increase domestic production and crude supplies to China, and reduce the Venezuelan government's vulnerability to litigation and fines in the United States.
According to a report from Argus Media, an industry research group, President Nicolas Maduro's government has received three offers ranging between $10 and $15 billion. The offers were submitted through Goldman Sachs, JP Morgan, and Deutsche Bank on behalf of buyers that include oil companies. The purchase would include Citgo assets, among them three U.S. refineries with a daily capacity of 757,000 barrels, 48 storage facilities, three wholly owned pipelines and stakes in six other pipelines in the U.S.
Citgo has been an important source of cash for the Venezuelan government, particularly in recent years as much Venezuela's oil exports to China are used to service its debts to the Asian giant and important lending partner. The U.S. has long been the top recipient of Venezuelan crude, in 2013 it received 797,000 barrels a day, down 49% from a decade before. Due to domestic financial constraints, the Venezuelan government has also been unable invest in domestic refineries, meaning that as overall exports to the U.S. have declined, imports of petroleum products from U.S. refineries to Venezuela have grown from 7,000 to 84,000 barrels per day over the last ten years. Deals signed earlier this year between Venezuela and China aim to push China's share of Venezuelan exports up from the current 600,000 barrels per day to 1 million by 2016.
The sale of Citgo would provide cash to shore up investments in struggling projects in Venezuela's western Orinoco crude belt and increase domestic production. According to differing reports, Venezuelan output currently remains stalled between 2.3 million and 3 million barrels per day. Completing the projects in the Orinoco belt would allow the country to produce up to 6 million barrels per day, and comply with Chinese requests to fulfill commitments linked to the $56 billion in loans the Chinese government has given the Venezuelan government and Pdvsa since 2007. Venezuela has almost 300 billion barrels of proven oil reserves, the most in the world ahead of Saudi Arabia and Canada.
Legal and financial concerns also drive the Venezuelan decision to sell. Two arbitration panels at the International Center for Settlement of Investment Disputes (Icsid) at the World Bank are reportedly poised to order Pdvsa to pay ConocoPhillips and ExxonMobil for their respective stakes in Venezuelan oil assets that were nationalized in 2007. While the two companies filed claims for approximately $42 billion, attorneys in Caracas believe the final ruling will likely apportion $7 billion to ConocoPhillips and $3 billion to ExxonMobil. The Venezuelan government's concerns are deepened by the possibility of an Icsid judgment leading to further litigation and liens on Citgo assets. Off-loading U.S. assets would leave Pdvsa in a better negotiating position should it face international arbitration, according to GlobalSource Partners.
The sale of Citgo is also likely a way to address the "grave liquidity situation" facing the government, according to a report from analysis firm Eurasia. Indeed, figures from the Venezuelan Central Bank revealed on August 6th showed that Venezuelan international reserves had declined 10.3% between July 2013 and July 2014, falling to $21.206 billion. A dearth in international reserves in the Central Bank would imperil import payments, debt payments, and the stability of Venezuela's currency, which has already proven wobbly. While the Maduro administration is contemplating some important economic adjustments, such as increasing domestic gas prices (currently the lowest in the world) and combining its multi-tier currency exchange regime, it has yet to implement any of them. Selling Citgo is likely a gambit for a short-term increase in cash, said Eurasia.
In response to swirling trade rumors, the Venezuelan government has responded coolly. In comments delivered on August 6th, Petroleum and Mining Minister, and President of Pdvsa, Rafael Ramírez said that when "…we have an offer that is convenient to our interests, we wil exit Citgo." He added, "[we] have no hardship, it is an important subject, but it is not an urgency. A revision of our international accounts has always been on our agenda." Ramírez did not confirm rumors about offers made for Citgo, but did say that Pdvsa was continuing to receive proposals. He also stressed that Pdvsa would not break its contracts or abandon any markets. (Photo: Rafael Ramírez, via)
The nature of Venezuelan oil itself may make it hard for Pdvsa to sell all its American assets to one buyer. Many U.S. refining companies are focused on cheap, light crudes produced domestically. Citgo's refineries at Lake Charles in Louisiana and Corpus Christi in Texas, with capacities of 427,800 and 163,000 barrels per day respectively, are set up to handle the heavy crude that comes from Venezuela. The third facility, a refinery at Lemont, Illinois with a 172,045 barrel per day capacity, may be more appealing because it does not process heavy crude and is close to inexpensive Canadian supplies.