Tags: Selling | Venezuela's | Crown | Jewels

Selling Venezuela's Crown Jewels

Thursday, 17 March 2005 12:00 AM

The Citgo of the 21st century is a creation of PDVSA. The company bought half of Citgo Petroleum Corp. in September 1985 from the Thompson brothers of Southland Corp. for $290 million. The Lake Charles, La., refinery produced 300,000 barrels per day (b/d). PDVSA agreed to provide 130,000 to 200,000 (b/d) of crude and feedstock for the Lake Charles refinery for 20 years.

Included in the sale were a percentage of two important pipelines, Colonial and Explorer; a lube plant; over 30 terminals; and an established gasoline market of branded outlets (then 6,900, now 13,800 franchised).

PDVSA continued to upgrade Citgo to process Venezuela's heavy crudes into cleaner-burning gasoline. Citgo announced in 1992 that it would spend $1.7 billion over the next five years to comply with the Clean Air Amendments for the new reformulated gasoline requirements passed by Congress in 1991.

Citgo continued to grow in size. Champlin Petroleum Company with its 160,000 b/d Corpus Christi refinery, including a petrochemical facility, and distribution system was added to Citgo, in September 1990. Citgo also acquired Seaview Petroleum Co., an asphalt refinery in Paulsboro, N.J., refining 84,000 b/d of Venezuela's heavy crude, and a fourth refinery was added in Savannah, Ga.

Until 2001, PDVSA sold its oil to Citgo at an arm's-length price, and for tax reasons Citgo did not pay dividends to PDVSA. Thus, PDVSA reinvested most of Citgo's profits in U.S.-based operations and acquired other U.S. refineries.

Under a 1999 treaty, Citgo's U.S. tax burden dropped from 30 percent to 5 percent, and in 2001 PDVSA received $213.75 million in dividends from Citgo from its 2000 earnings. Chavez continues to receive annual Citgo dividends.

When Hugo Chavez became president of Venezuela in February 1999 he took over PDVSA, changing its president and board at a whim, and finally in January 2005 naming the minister of energy to be also the president of "Petroleos de Chavez." The former PDVSA is effectively Chavez's own company, and he can sell any part of it. Well, maybe not.

Chavez's PDVSA, in December 2003, announced that it would sell its 50-percent stake in Ruhr Oel (four refineries in Germany) to Russia's Alfa Group. In 1983, the Ruhr Oil joint venture with Veba Oel had been the beginning of PDVSA's "internationalization." Twenty years later, Ruhr Oel was also the beginning of Chavez's efforts to sell PDVSA's overseas refineries.

In June 2004, however, the sale to the Alfa Group was suddenly dropped. Why? There was no explanation. Chavez had planned to buy 50 Russian MiGs (with the sale of Ruhr Oel?), and Russia through the Ruhr purchase would have gained a 2,000 distribution system in Europe. Perhaps it was BP (British Petroleum), which had purchased Veba Oel and therefore now owned the other half of Ruhr Oel, that quashed the PDVSA sale.

Chavez has a problem trying to sell Venezuela's foreign refineries because most of them are run as joint ventures – and their partners in these ventures, who initially sold half of their refineries to PDVSA, have a say in what company they will accept as a new partner. Since PDVSA owns all of the four Citgo refineries, and Citgo is its largest overseas affiliate and is also

However, if there is a sale of Citgo – only with the U.S. government's permission – it could be a fire sale. Chavez does not seek to realize Citgo's $5 billion-plus worth in today's market. He wants to stop sending Venezuelan oil to the U.S. (to Citgo), and he wants to prevent the possibility of the U.S. freezing Citgo's assets (after some foolhardy action on his part).

It appears that Chavez is considering the sale of Citgo to foreign buyers, i.e., the Russians (Lukoil), Brazilians (Petrobras) or Arabs, with the Chinese now excluded by the U.S. Homeland Security Department. Presently, there appear to be two U.S. independent refiners, Valero Energy (CEO Bill Greehey), and Premcor Inc. (formerly Clark USA) that are interested in one or two of Citgo's refineries.

Chavez's hatred of the United States and President Bush and his need for funds for his corrupt regime are the driving forces behind his wish to sell Venezuela's foreign crown jewel. Citgo is a corporation that was carefully constructed by Venezuelan oilmen under the Brigido Natera presidency, to conquer the United States downstream market, where Venezuela has traditionally sold half of its oil production.

The real value of all the nine PDVSA refineries in the United States is represented by the opportunity of marketing Venezuela's medium/heavy crude oils through PDV America (which includes refinery ownership of Citgo; Citgo-Lyondell, 41 percent; Hovensa, St. Croix joint venture; Chalmette, La., 50 percent participation; Sweeney, Texas, joint venture; and Lemont, Ill., now 100 percent).

PDVSA also markets Venezuelan refined oil products through PDV America. In 1999, Hugo Chavez's first year in power, PDV America amounted to nearly half of all PDVSA's market, selling over 1.5 million b/d of product.

However, with the decline of 500,000 b/d in Venezuelan crude production (now 2.5 million b/d or less) and around 100,000 b/d of oil exports to Cuba and other exports to new markets like China and Argentina, PDVSA has to purchase increasing amounts of oil on the open market, in order to supply its foreign refineries. The Chavez solution: Sell Venezuela's crown jewels!

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The Citgo of the 21st century is a creation of PDVSA.The company bought half of Citgo Petroleum Corp. in September 1985 from the Thompson brothers of Southland Corp. for $290 million. The Lake Charles, La., refinery produced 300,000 barrels per day (b/d).PDVSA agreed to...
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Thursday, 17 March 2005 12:00 AM
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