Venezuela Agrees to Pay $2 Bln Over Seizure of Oil Projects

(The New York Times, Clifford Krauss, 20.Aug.2018) – More than a decade ago, Venezuela seized several oil projects from the American oil company ConocoPhillips without compensation. Now, under pressure after ConocoPhillips carried out its own seizures, the Venezuelans are going to make amends.

ConocoPhillips announced on Monday that the state oil company, Petróleos de Venezuela, or Pdvsa, had agreed to a $2 billion judgment handed down by an International Chamber of Commerce tribunal that arbitrated the dispute. Pdvsa will be allowed to pay over nearly five years, but as it is nearly bankrupt, even those terms may be hard to meet.

After winning the arbitration ruling in April, ConocoPhillips seized Pdvsa oil inventories, cargoes and terminals on several Dutch Caribbean islands. The move seriously hampered Venezuela’s efforts to export oil to the United States and Asia, and emboldened other creditors to seek financial retribution.

“What they did was choke the exports and made it clear to Pdvsa that the cost of not coming to an agreement would be higher than actually settling on a payment schedule,” said Francisco J. Monaldi, a Venezuelan oil expert at Rice University.

As its oil production has plummeted to the lowest levels in decades, Venezuela has fallen behind on more than $6 billion in bond payments. Pdvsa has already defaulted on more than $2 billion in bonds after failing to make interest payments over the last year, and owes billions of dollars more to service companies.

Adding to Venezuela’s woes, the Trump administration has imposed sanctions that prohibit the purchase and sale of Venezuelan government debt, including bonds issued by the state oil company.

Mr. Monaldi said Pdvsa would be forced to pay ConocoPhillips with money it would have paid other creditors and would probably delay some oil shipments to China it owes in separate loan agreements. He added that “there is not a negligible probability” that at some point it will discontinue payments for lack of money.

Hyperinflation, corruption and growing starvation have crippled the Venezuelan economy, as the socialist government is forced to choose between buying food and medicine and satisfying the demands of creditors. Over the last few days, the government has scrambled to deal with its economic crisis by sharply devaluing its currency, raising wages and promising to shave energy subsidies.

Venezuela has the largest oil reserves in the world. Its crisis has tightened global oil markets at a time when threatened United States oil sanctions against Iran could drive up prices.

The settlement with ConocoPhillips over the 2007 seizure resolves a drawn-out legal struggle, at least for the time being.

“As a result of the settlement, ConocoPhillips has agreed to suspend its legal enforcement actions of the I.C.C. award, including in the Dutch Caribbean,” ConocoPhillips said in a statement.

Pdvsa, which did not comment on the agreement, is to pay the first $500 million within 90 days.

ConocoPhillips is pursuing a separate arbitration case over the same seizure against the government of Venezuela before the World Bank’s International Center for Settlement of Investment Disputes, which could result in another large settlement award, perhaps as high as $6 billion.

That amount would probably be unpayable, experts say, but it could put ConocoPhillips in a strong position to obtain access to Venezuelan oil fields in the future if the current government eventually falls.

Pdvsa’s problems with creditors are far-reaching, putting its American Citgo assets, including three large refineries and a pipeline network, in jeopardy. A federal judge in Delaware recently ruled that Crystallex, a Canadian gold mining company, could seize over $1 billion in shares of Citgo as compensation for a 2008 nationalization of a mining operation in Venezuela.

Citgo is appealing. If it loses, that may open the way for more claims on Citgo assets by companies whose investments have been expropriated in Venezuela, including Exxon Mobil.

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Is Venezuelan Oil Output Falling Faster Than Expected?

(OilPrice.com, Nick Cunningham, 12.Aug.2018) – The bad news from Venezuela continues.

In July, Venezuela’s oil production came in lower than PDVSA had targeted, according to Argus Media. While PDVSA had hoped that it, along with its joint venture partners, would produce as much as 1.65 million barrels per day (mb/d) in July, actual production came in at about 1.526 mb/d.

Argus says that production in the Orinoco heavy oil belt, where vast oil reserves are located, was a particular disappointment. The problem for Venezuela is that the Orinoco belt was supposed to hold up better than conventional oil production from elsewhere. The declines are a grave problem for the South American OPEC nation, and they pose an existential threat to the regime of President Nicolas Maduro, who avoided an apparent assassination attempt days ago.

But the production figure that Argus got its hands on, which came from an internal report from PDVSA, seem optimistic, even though they do point to shortfalls. After all, the June OPEC report suggested that output stood at just 1.34 mb/d – data that came from secondary sources, which includes Argus.

Against that backdrop, the 1.526 mb/d figure doesn’t seem credible. Indeed, sources from within PDVSA told Argus that officials from the company’s eastern and western divisions “systematically inflated” the data. “They play with the storage tanks and what they report is not reality,” a senior executive told Argus. In reality, production could have been as low as 1.25 mb/d.

The report is not entirely useless, however, as it does offer some clues into the company’s demise. Argus says that “scant maintenance, reservoir management, skilled labor flight and a lack of critical naptha and light crude for transport and blending” are all contributing to the steep decline in production. An estimated 1,191 wells stopped producing in July.

In a separate report from Argus, it appears that the island of Curacao is “scrambling for a lifeline to resuscitate” the century-old Isla refinery that PDVSA “has nearly abandoned,” due to the fact that ConocoPhillips moved in to seize the facility following an international arbitration decision earlier this year. Curacao says it has the capability to operate the refinery on its own, but it doesn’t have the capital nor the supply of crude oil needed as a feedstock. The refinery can theoretically produce up to 335,000 barrels per day (bpd), but in reality it can probably only produce two-thirds of that amount. For now, it is barely operational with PDVSA no longer supplying the refinery with crude oil.

From PDVSA’s standpoint, the loss of the refinery has only compounded the problems back in Venezuela since the facility was critical to blending and preparing oil for export.

The problems in Venezuela are so bad that even the Trump administration, no stranger to conflict, has decided that it does not want to kick the country while it is down. After having been on the verge of implementing sweeping sanctions – possibility targeted at Venezuela’s oil exports, or perhaps the export of diluent from the U.S. to Venezuela – the Trump administration has scrapped those plans.

In fact, the problems in Venezuela are so acute, that the attempted assassination of President Maduro barely moved the oil market, as the WSJ pointed out. That bears emphasis: There was an attempted coup in a country with the largest oil reserves in the world, a founding OPEC member and still a major oil producer, and the markets basically shrugged it off. And that is not because the oil market is oversupplied – there is a reasonable case to be made that the market could be short on supply at some point this year.

But Venezuela’s oil sector is in shambles, so oil traders are apparently already of the mind that it cannot possibly get any worse. A coup even leaves open the very remote possibility of a rebound, although, as Francisco Monaldi details, growing production by, say, 200,000 bpd per year would require a sustained effort, including investments of around $20 billion per year for a decade. Not to mention a radical change in the political context and a macroeconomic stabilization program. Needless to say, none of that appears to be in the cards anytime soon.

In any event, the coup did not succeed, so the losses are destined to continue. “The permanence of Maduro and his radical circle of collaborators is short-, medium- and long-term bullish for oil prices because the regime will fail to take the steps needed to turn production around,” Raúl Gallegos, a political analysts at Control Risks, and author of Crude Nation, told the Wall Street Journal.

Expect PDVSA to continue to miss its production targets.

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Crystallex Cuts Others In Line for Citgo Assets

(Energy Analytics Institute, Jared Yamin, 11.Aug.2018) – Crystallex seems to have cut in line while there are many others already in line for CITGO assets and value.

What follows are comments published by Venezuelan oil analyst Francisco Monaldi in a series of tweets related to the legal battle over CITGO:

1) The value of CITGO is much higher than the claim by Crystallex, which by the way was an outrageously high amount for that expropriation,

2) This is the beginning of a shark fest of claims and lawsuits. There are many others in line for CITGO assets and value, CITGO bond holders, CITGO creditors, PDVSA 2020 bondholders, Rosneft, Conoco, other PDVSA and Venezuela creditors and ICSID claimants. It seems to me that Crystallex should not be ahead in this line,

3) In the short term this would be a blow for PDVSA making it harder to get diluents from the US and to earn cash from its heavy exports, but it is just the last in a long list of troubles including default and sanctions,

4) In the long term it would be a big blow to Venezuela, losing a strategic asset to access the USGC market in competition with Canadian heavy, particularly after Keystone is completed,

5) Outside of CITGO, Venezuela has only a few much less valuable assets, what claimants will try is to seize or disrupt PDVSA’s flows of oil and receivables, and force them to negotiate something, and

6) This is a tragic story of recklessness and incompetence by the chavismo, increasing the debt without investment, expropriating and destroying value, in the middle of an oil boom. The consequences, collapsed oil production and now the final reckoning with their claimants…

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Analysts: Only a Matter of Time Before Venezuela Loses Citgo

A tanker sails out of the Port of Corpus Christi in Texas after discharging crude oil at the Citgo refinery. Photo: Eddie Seal, Stf / Bloomberg

(Houston Chronicle, Jordan Blum, 10.Aug.2018) – Financially crippled Venezuela likely will lose control of its Houston refining arm Citgo Petroleum once a slew of lawsuits eventually are resolved, and it’s just a matter of when and to whom, finance and energy analysts said Friday.

A federal judge ruled late Thursday that a defunct Canadian mining firm can go after Citgo’s assets to collect $1.4 billion it allegedly lost from Venezuela when the government seized mining and energy assets more than a decade ago under the late socialist leader Hugo Chávez.

While the Canadian firm, Crystallex International, is unlikely to take control of Citgo’s refining and retail gasoline assets throughout the U.S., the ruling is expected to kick off an array of new legal claims against Venezuela and its state oil company – from Houston-based ConocoPhillips to other oil and gas firms – with the goal of winning Citgo as the prize, legal and finance experts said. After all, Venezuela owes a lot of money to a lot of different companies.

Whichever company eventually wins out could sell to refiners that might be interested, including San Antonio’s Valero Energy, Houston’s Phillips 66, Ohio-based Marathon Petroleum and New Jersey’s PBF Energy, said Jennifer Rowland, and energy analyst with Edward Jones in St. Louis.

“It’s not every day that a suite of refineries becomes available, especially along the Gulf Coast,” Rowland said. “Those assets would definitely fit in some companies’ portfolios.”

Citgo, which declined comment Friday, owns oil refineries in Corpus Christi, Lake Charles, La., and Illinois. The company employs about 4,000 people in the U.S., including 800 in Houston. Citgo has roughly 160 branded gas stations in the Houston area, and about 5,500 nationwide. The company is valued at nearly $8 billion.

Citgo is a U.S. company with a more than 100-year history. It was acquired by Venezuela’s state-run oil company three decades ago. The state oil company, Petroleos de Venezuela SA, is known as PDVSA.

The Citgo assets are seen as the crown jewel for companies targeting PDVSA legally because they’re the most accessible assets outside of Venezuela, said Craig Pirrong, a University of Houston finance professor specializing in energy markets. Thursday’s court ruling opened the door for many more claims made against Citgo by those owed money by Venezuela, he said, because the judge allowed Venezuela’s debts to extend to its U.S. refining assets as an “alter ego” of the government.

“It’s going to be like a feeding frenzy going after Citgo,” Pirrong said.

And now a series of complex legal battles will ensue, possibly dragging out into next year, said Franciso Monaldi, a fellow in Latin American Energy Policy at Rice University’s Baker Institute for Public Policy.

“I don’t expect PDVSA to immediately lose control of Citgo, but I think eventually it will happen,” Monaldi said. “It’s really just a matter of who will get it.”

Venezuela has suffered a financial and geopolitical freefall under Chavez’ socialist successor and current president, Nicolas Maduro. Many thousands of people have fled the country, fearing starvation and violence, including some PDVSA workers, as the country’s oil production has plummeted.

As he’s consolidated power in the destabilized nation, Maduro jailed an opposition lawmaker this week after a failed assassination plot that involved two flying drones with explosives.

Citgo has faced increasing uncertainty since November, when its acting president and five other Houston-based executives with dual citizenship were arrested in Venezuela on corruption charges.

Maduro installed Chávez’s cousin, Asdrúbal Chávez, as the new Citgo president. Although he remains in charge, the new Citgo leader was ordered in July by the U.S. State Department to surrender his U.S. visa amid an ongoing probe into PDVSA. Citgo said Chávez would continue in his role remotely for now.

The future of Citgo is further complicated because 49.9 percent of Citgo is pledged to Russian oil giant Rosneft as collateral for a $1.5 billion loan. The U.S. government would fight losing control of Citgo to Russian interests, analysts said.

As for Crystallex, Thursday’s ruling doesn’t actually hand Citgo over to the defunct firm. But it does position Crystallex to force a large settlement from Venezuela, Monaldi said.

He added that ConocoPhillips could make a stronger claim for Citgo because it’s already won a $2 billion ruling against PDVSA, and not just Venezuela as a whole. In the spring, ConocoPhillips won court orders to seize PDVSA assets on Caribbean islands, quickly taking action against refining and oil storage assets in the Caribbean islands of Curacao, Bonaire and Sint Eustatius.

But ConocoPhillips said it is still a good ways off from recouping the full $2 billion. ConocoPhillips also argued PDVSA has transferred some petroleum products to Citgo to prevent their seizure.

“It’s looking bleak for Venezuela,” Pirrong added.

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