PDVSA Asset Sales May Shield Venezuela from Seizures

Source: Reuters 9/24/2014, Location: South America

Venezuelan state-run oil company PDVSA's rushed move to sell units raises questions whether Venezuela wants to reduce international exposure to avoid potential asset grabs in the event companies win arbitration cases against the country.

Latin America's leading crude producer is seeking to sell its major U.S refining unit Citgo Petroleum Corp, as well as stakes in the Hovensa refinery in the U.S. Virgin Islands, the Chalmette refinery in Louisiana, and a network of refineries in Sweden, England and Scotland.

The socialist government has shrouded the potential deals in secrecy, leaving analysts and industry players scrambling to piece together a rationale for the surprise divestment.

Most say the overarching reason behind the potential sales is a pressing need for liquidity in cash-strapped PDVSA and the government, which is looking to shore up its coffers ahead of key bond payments amid a declining economy.

But industry experts also point out PDVSA may be keen to reduce its international exposure ahead of ExxonMobil Corp and ConocoPhillips arbitration decisions due in coming months.

The companies are seeking compensation after their projects were taken over under late President Hugo Chavez, who led a wave of nationalizations that included the oil, electricity and steel industries.

While Venezuela has sworn it would pay if served a negative award, market fears have grown as PDVSA may be preparing for its biggest pullback ever from the U.S. refinery market as the country's financial crisis worsens.

"The government would likely struggle to pay those (arbitration) awards in cash, given limited resources, and will probably look instead to settle any rulings with bonds or oil assets," consultancy Eurasia Group said in a note. "However, the government is likely looking to reduce its vulnerabilities in the event that claimants are unwilling to accept alternative sources of compensation."

Enforcing complicated arbitration decisions would likely take years given the appeals process.

Still, the more than 20 companies that have brought Venezuela to arbitration over nationalizations are comforted by the thought that its international assets could theoretically be seized in the event the country is unwilling to comply.

"The companies that have arbitrations against Venezuela have always seen the CITGO assets as a guarantee should a hypothetical award need to be forcefully executed," said Carlos Bellorin, petroleum analyst at IHS.

Less exposure also reduces the need to foster positive diplomatic and commercial relations with the United States, which are already dwindling.

Asia overtook North America last year as the main destination for Venezuelan exports of crude oil and processed fuels. PDVSA, once the top supplier of foreign oil to the U.S., has slipped to No. 4 as surging North American output cuts demand for imports.

PDVSA did not respond to request for comments.


Several economic factors caution against selling behemoth Citgo, seeming to lend weight to the theory political calculations are also behind the asset sales.

Citgo clocked a $778 million net profit last year. It is PDVSA's biggest cash-paying client.

Both those factors are hugely important for Venezuela, which sends financed shipments of oil to political allies and accepts in-kind payments like rice or jeans for other shipments.

Furthermore, sources close to PDVSA say President Nicolas Maduro did receive an alternative proposal suggesting Citgo issue new bonds to raise cash instead of selling up. The proposal also suggested PDVSA swap some of its bonds to push back their maturity.

Some also question the wisdom of PDVSA selling its coveted refineries to competitors, especially as Citgo takes in some of the South American country's lowest-quality crudes. And given the fast-changing nature of crude oil flows in the Americas, it may not be the optimal moment to sell most of Citgo's refineries.

Not having Citgo on hand could essentially speed up PDVSA's pull back from the North American market. The company has been absorbing some 160,000 barrels per day (bpd) of Venezuelan heavy crudes this year, or 22 percent of Venezuelan oil exports to the United States, according to data from the Energy Information Administration.

To be sure, it remains to be seen whether PDVSA goes through with the sale of Citgo, a controversial move mulled several times in the past that some in the leftist bloc decry as a covert privatization.

Some government supporters have long grumbled about having a network of refineries in the United States, Venezuela's ideological foe, but PDVSA has worked hard in recent years to maximize Citgo's delivery of dividends.

Maduro on Tuesday said Citgo will continue a welfare project in the United States. Some Venezuelan media interpreted the comments as a sign the government may be reconsidering plans to sell, though he said nothing specifically about that.

A potential silver lining to a sale could be an influx of cash into PDVSA, which sorely needs money to bolster faltering exploration and production.

But with Venezuela's cash reserves dwindling, inflation topping 60 percent and popular social programs in need of funding, many are downbeat about the chances of potential revenue being reinvested in the sector.

"It is clear that the fiscal voracity of the central government is hindering the prospects of boosting oil production," Deutsche Bank wrote in a note to clients.

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Related Categories: Accounting, Statistics  Acquisitions and Divestitures  Asset Portfolio Management  Economics/Financial Analysis  General  Industrial Development  Insurance  Investment  Mergers and Acquisitions  Risk Management 

Related Articles: Accounting, Statistics  Acquisitions and Divestitures  Asset Portfolio Management  Economics/Financial Analysis  General  Industrial Development  Insurance  Investment  Mergers and Acquisitions  Risk Management 

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