Print Edition - 2019-02-12 | MONEY
US refiner Citgo emerges as key to Venezuela’s power battle
-, New York
Feb 12, 2019-
The US 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, despite scattered defections. He has the loyalty of the Supreme Court. And he 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: Houston-based 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 US and other countries as Venezuela’s legitimate president.
Such a feat would give Guaido a slice of de facto power.
“It’s more than symbolic,” said William Burke-White, a professor of international law at the University of Pennsylvania who served in the State Department under the Obama Administration. “An alternative power is starting to emerge. This is about creating a world where there is another entity contesting every point of authority that Maduro has.”
Here’s a look Citgo’s critical role in Venezuela’s power struggle.
US refiners like 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 amid chronic underinvestment in PDVSA and oil prices have dropped from historic highs.
Until US sanctions prohibited, 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 US
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.
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 who focuses on the energy sector.
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 749,000-barrel-a-day capacity. Most of the Venezuelan oil was processed at its Lake Charles refinery in Louisiana, which is specially equipped to handle the high-density, high-sulfur crude that Venezuela exports. That type of crude oil is in short supply because of production cuts in other countries like Mexico and Saudi Arabia.
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.
Guaido has said he will soon name a new board of directors for Citgo. Legally, there may be little stopping him from doing so. There is some precedent, as when the US and other countries recognized a coalition of rebel groups in Libya as the official government in 2011 when Moammar Gadhafi still controlled Tripoli.
Published: 12-02-2019 11:31