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Selling off Venezuela´s jewels

By Emma Brossard | PetroleumWorld.com

17.03.05 | Recent articles on Hugo Chavez’s proposed sale of Citgo ignore the growth in its value since PDVSA acquired Louisiana’s second largest refinery. The Citgo of the 21st Century is a creation of Petroleos de Venezuela (PDVSA). When PDVSA bought half of Citgo Petroleum Corp. in September 1985, from the Thompson brothers of Southland Corp., they paid $290 million for half of the Lake Charles 300,000 b/d refinery. PDVSA agreed to provide 130,000 to 200,000 barrels per day (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; and over 30 terminals; and an established gasoline market of branded outlets (then 6,900, now 13,800 franchised).

By the time PDVSA announced in November 1989, that it would buy the other half of Citgo for $675 million, crude runs in the refinery were averaging 284,000 b/d, and because of many mothballed refineries after the U.S. decontrol of oil, it was now a buyer’s market for refineries. The Citgo refinery had been upgraded between 1982 and 1984 (by Cities Service and then Southland) at a cost of $500 million, making it one of the most advanced in the industry. And 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, New Jersey, refining 84,000 b/d of Venezuela’s heavy crude; and a fourth refinery was added in Savannah, Georgia.

Until 2001, PDVSA sold its oil to Citgo at an arms 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 treaty in 1999, Citgo’s U.S. tax burden dropped from 30% to 5%, and in 2001 PDVSA received $213.75 million in dividends from Citgo, from its 2000 earnings. Chavez continues to receive annual Citgo dividends.

Hugo Chavez not only became President of Venezuela in February 1999, but also took over PDVSA, changing its president and board at a whim, and finally in January 2005 naming the Minister of Energy also 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 they would sell its 50% stake in Ruhr Oel (four refineries in Germany) to Russia’s Alfa Group. In 1983, the Ruhr Oil joint venture with Veba Oel was 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. However, in June 2004, 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) that 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 refinery 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 their largest overseas affiliate, and is in the largest market, Citgo would be expected to fetch the largest amount of cash and procure a buyer.

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 Hugo 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, is the driving force 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%); Hovensa, St. Croix joint venture; Chalmette, Louisiana, 50% participation; Sweeney, Texas joint venture; and Lemont, Illinois now 100%). 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 their foreign refineries. The Chavez solution: sell the Crown Jewels!

Emma Brossard grew up and worked in the oil industry in Venezuela. Her first book, Petroleum Politics and Power was published in 1983; followed in 1993 by Petroleum Research and Venezuela's INTEVEP. For 18 years, Prof Brossard taught political philosophy, Latin American politics, and energy politics, in several Midwestern and Southern univerisities. She has a BA from the Univ. of Wisconsin, MA and Ph.D. from Claremont Graduate University. An energy consultant for many years.



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