Venezuela’s CITGO Closer to Breakup as Court-Ordered Sale Moves Forward

Caracas, October 12, 2022 (venezuelanalysis.com) – Venezuela’s US-based oil subsidiary CITGO is closer to being seized by creditors after a circuit judge set a share auction process in motion.

On Tuesday, Delaware District court judge Leonard P. Stark laid down a schedule and guidelines for a “competitive and robust bidding process” for PDV Holding shares, according to documents seen by Venezuelanalysis. PDV Holding is CITGO’s parent company. The order likewise hires banking firm Evercore as an adviser in the operation.

The legal proceedings stem from Canadian miner Crystallex’s efforts to collect a US $1.4 billion international arbitration award granted by the World Bank’s International Center for Settlement of Investment Disputes (ICSID) in 2016. A reported $970 million are outstanding. Crystallex sought compensation for the 2008 nationalization of Las Cristinas gold mine in eastern Venezuela.

CITGO, which owns three refineries and a network of over four thousand gas stations stateside, has been run by the Venezuelan hardline opposition since 2019. The US recognition of self-proclaimed “Interim President” Juan Guaidó as the country’s legitimate leader allowed the then-head of parliament to take control over US-based state assets. CITGO is valued at around $8 billion.

Stark approved the sixth iteration of the sales procedure after addressing or dismissing objections from all parties. It allows for a stalking horse offer and for the highest bidder to buy some or all of the shares, which could lead to a breakup of the company. The judicial order sets the bidding process to be “reasonably calculated” in order to at least satisfy the claims.

The sale is being led by court-appointed “Special Master” Robert B. Pincus, who now has six months to consult the US Treasury Department’s Office of Foreign Assets Control (OFAC) and seek support for the auction. The Treasury has an order in place blocking any seizure of frozen Venezuelan assets without specific authorization in a bid to boost Guaidó’s political prospects.

Nevertheless, the process could move forward without the green light from US authorities with the winning bidder looking to secure a license later. The Delaware judge additionally stipulated he would not make any final decision before 270 days, meaning any potential sale would not take place before late 2023 at the earliest.

Crystallex attorney Rahim Moloo welcomed the judicial order but stressed that the corporation remained “willing to settle the dispute.” The Maduro government had reached a settlement with the mining company in 2018 but US sanctions made it impossible for the Caribbean nation to fulfill its payments.

Business outlet Argus Media also argued that the long process might be designed to “encourage out-of-court settlements.”

Horacio Medina, chairman of the CITGO board appointed by the defunct, opposition-controlled National Assembly, told Reuters that the company is currently consulting its lawyers to decide its next steps and explore “alternative options” to the auction.

While the sales procedure was triggered by Crystallex, other corporations with claims secured in international arbitration against Venezuela are likely to try and attach themselves to the proceedings.

Koch Minerals and Koch Nitrogen reportedly applied to link their $387 million award to the Delaware court-ordered process. ConocoPhillips is likewise trying to collect $1.3 billion out of $2 billion in compensation won in 2018 at an International Chamber of Commerce (ICC) tribunal for two joint oil ventures formerly held in Venezuela. The oil giant has been monitoring the case and filed a motion to be paid via CITGO share sales.

Other claimants could include glass firm Owens-Illinois (owed $500 million) and Rusoro Mining ($967 million), both of which have signaled intent to collect through the US-based refining subsidiary. ConocoPhillips also has an $8.5 billion ICSID award that the Caribbean nation is currently trying to overturn. The California-based corporation secured a default ruling in a DC court to enforce the award after Guaidó’s representation failed to show up in court for more than two years.

However, the claimants first need to prove in court that CITGO is an “alter ego” of the Venezuelan state before the company’s shares can be used as compensation. Given the long-drawn nature of litigations as well as possible appeals, firms might be unable to join the ongoing auction procedure.

The US-based subsidiary is likewise liable to claims from holders of the defaulted PDVSA 2020 bonds as 50 percent of the company’s shares were pledged as collateral. Bondholders are owed a reported $3.4 billion and the US Treasury has forbidden transactions with the bond as well.

The US-backed “interim government” has come under fire for endangering Venezuela’s most important asset abroad. Guaidó and his associates have been accused of negligence in court cases, under-the-table deals with creditors and alleged conflicts of interest.

The CITGO board raised further suspicions when it hired JP Morgan to in September 2021 to advise in dealing with creditors without the knowledge of the Guaidó-led parliament. A number of deputies who were elected in 2015 still hold occasional virtual sessions despite their term running out in January 2021.

The Maduro government rejected the “arbitrary” and “illegal” order by Judge Stark in a communiqué on Wednesday. Caracas claimed that attempts to seize CITGO are part of a “multipronged war” against the country and pointed the finger at the role of Guaidó and his former prosecutor José Ignacio Hernández in hindering efforts to defend Venezuelan assets in US courts.