Publish in Perspectives - Wednesday, March 13, 2019
Ctigo headquarters in Houston, Texas. Venezuela's interim president Juan Guaido has been able to take control of the company, but not its former parent company PDVSA. (Photo: Citgo)
The consequences of two different boards at oil companies PDVSA and Citgo.
BY ENERGY ADVISOR
Venezuelan opposition leader Juan Guaidó in February announced the appointment of new boards for state oil company PDVSA and for Citgo, the firm’s U.S.-based refiner, amid efforts to push President Nicolás Maduro out of power. What are the consequences of having two PDVSA and Citgo boards, one named by Maduro and the other by Guaidó? How will the companies be able to conduct business amid the legal uncertainty over governance? How will the parallel structure affect PDVSA’s relations with creditors?
Carlos A. Rossi, president and owner of EnergyNomics in Caracas and professor of petroleum economics: Having two PDVSA and Citgo boards affects each company differently. PDVSA can try to ignore Juan Guaidó’s appointments but not its consequences. They can try to find new markets for its oil in the few friendly nations that it still has, such as Russia–who can buy its oil and re-sell it to its customers—or China, India and Turkey, who can purchase it for consumption. The latter option carries a heavy price for PDVSA, as these nations will demand deep discounts to a desperate seller and to compensate for the sanctions that the United States and others may impose on them.
As for Citgo, it has cut ties with PDVSA to avoid the impact of sanctions and to keep systems operating. They have other providers, namely Canada. Citgo is in the opposite camp of PDVSA. They will respect the mandates from Washington and ignore Caracas. Citgo has no legal uncertainty—they will abide by U.S. law—but it will hurt its bottom line for a short period of time. Its creditors will likely understand, and most will probably roll over their debt for an extended period. There is the issue of the heavy crude quality of Venezuelan oil which Citgo is designed to manage while most other refineries are not; and that complicates matters for both, but much more for PDVSA, as its market of prospective buyers shrinks. PDVSA’s relations with its creditors are deeply affected already and will surely worsen every day Maduro and chavismo remain in Venezuela. PDVSA bonds are already at rock bottom in the secondary market because of the sanctions.
By the end of March, all Americans working as contractors to PDVSA will be banned from continuing to do so. By April, any company that has minimal financial relations with the United States and is buying PDVSA crude must quit or face heavy fines for violating U.S. sanctions. Venezuela will stop paying its creditors and may declare force-majeure; except that this clause does not include commercial sanctions for political or humanitarian reasons.
Frank L. Holder, managing director, global head of investigations and regional head of Latin America at Berkeley Research Group: Citgo, as a U.S.-based company, is more directly exposed to the U.S. decision to recognize Guaidó, and consequently he has been more successful at having his appointees take over the internal management of the company. Citgo has a factoring contract with a large European bank that is necessary for its survival. A license from Treasury is all that maintains the financing. The firm has essentially severed its ties with the Maduro administration. PDVSA is a marked contrast to Citgo. The Guaidó board has so far been unable to influence the internal organization.
They will likely have a great deal of influence in PDVSA’s foreign affairs, especially regarding matters based in countries that officially back Guaidó, but current volatility with regards to sanctions makes it unlikely that any foreign entity will do business with either group beyond what is strictly necessary until things become clearer. The existence of two PDVSA boards will push the Maduro administration to do business in unorthodox markets for Venezuelan oil, such as India and China. They are also looking for ownership mechanisms which would allow their foreign assets to escape the sanctions.
As for Citgo, out of the 749,000 barrels of crude oil that they refine daily, 200,000 come from Venezuela, meaning that they will have to find a way to replace 27 percent of their crude supply in the short term. This is not a killing blow, but it will severely tax their finances. As for PDVSA, their supply chain operations are severely affected, as well as their capabilities to dispatch and sell hydrocarbon products, resulting in a reduction of the already minimal production due to storage problems as well as having to sell oil to new markets at a lower price. It is hard to imagine a short-term scenario in which debt refinancing or default of corporate issued bonds does not occur.
Arturo H. Banegas Masiá, partner at the Latin America and the Caribbean practice group of Akerman: The recent ascension of Juan Guaidó as interim president has raised legitimate questions regarding the future composition of the Venezuelan government and control over vital assets, including PDVSA and its subsidiaries. The United States has moved swiftly, in concert with more than 50 other countries, to recognize Guaidó as legitimate president. The Trump administration has also imposed sweeping sanctions on senior members of the Maduro-led government, PDVSA and other critical assets, in an effort to destabilize Maduro and fund the interim administration. Venezuela’s National Assembly, led by Guaidó, designated a new board of directors for PDV Holding, Citgo Holding and its subsidiary, Citgo Petroleum Company, which opens the path to securing Venezuela’s U.S.-based assets. However, the different boards previously appointed by Maduro claim to remain in office and in control of those assets. Guaidó retained legal representation for Venezuela’s interests in the United States and was granted with a favorable decision from a U.S. District Court. However, Maduro’s representatives have objected to the decision. In the past, similar situations occurred after the Chinese Revolution, and more recently, after Gen. Manuel Noriega’s coup in Panama. In both cases, U.S.-based banks refused to render assets to China’s Communist Party and to the Noriega regime, and also in both cases, the unrecognized governments brought action against the banks. To decide who would be entitled to represent such countries, U.S. courts deferred to the U.S. executive branch. U.S. courts consistently ruled in favor of the government recognized by the executive.
However, while the tug-of-war over control of the assets is settled, this may severely affect all commercial dealings of the companies.
Christina P. Maccio, partner at DLA Piper: First, there are not two Citgo boards, and Juan Guaidó is not an opposition leader, but rather the interim president. At least 50 countries have recognized him as the only legitimate president of Venezuela.
The United States’ recognition of Guaidó has far-reaching implications within the U.S. legal system, especially as it relates to Citgo. Under U.S. law, there is only one board that oversees Citgo: the board appointed by Guaidó. While Maduro has threatened a protracted legal battle over control of Citgo, under U.S. legal precedent, there is little probability of success that the Maduro regime or his appointed PDVSA board will be able to successfully assert a legal challenge in the United States. Indeed, under U.S. legal precedent, neither Maduro nor his appointees would have standing to be heard in U.S. court. This leaves the question of PDVSA.
The Venezuelan National Assembly and President Guaidó have appointed a PDVSA board. While it is true that there is a struggle for control over PDVSA within the borders of Venezuela, U.S. sanctions seek to deprive the Maduro regime of funds and to isolate it financially. In light of this reality, it is imperative that creditors and counterparties of PDVSA consult with experienced sanctions and commercial counsel for guidance.
Juan Pablo Fuentes, economist
at Moody’s Analytics: “On Feb.
13, Venezuela’s National Assembly named new board members
for PDVSA and for PDVSA’s U.S.-based
subsidiaries; PDV Holding, Citgo Holding
and Citgo Petroleum Corporation. The sole objective of this action was to allow interim president Juan Guaidó complete control of Citgo operations in the United States.
According to an official release by Citgo, dated Feb. 22, the new board has effectively taken control of Citgo operations. Furthermore, according to press reports, former board members and top executives loyal to Nicolás Maduro—including former chief executive officer Asdrúbal Chávez—have been cut off from the company. With a new board in place, Citgo will now be allowed to operate freely in the United States despite the current strict oil sanctions against the Maduro regime. Citgo’s main refineries will still need to find new sources of crude oil, which might cause partial short-term disruptions. For the Maduro regime, the takeover of Citgo operations by Guaidó represents a hard blow. Citgo has been a main source of cash for Maduro amid PDVSA’s dire financial situation. Without access to Citgo-generated cash, PDVSA’s financial situation becomes even more critical. The appointment of an ad-hoc PDVSA board by the National Assembly was never intended to produce a takeover of PDVSA operations in Venezuela.
The struggling oil company remains firmly controlled by the Maduro regime. Yet in the eyes of the U.S. legal system, the new PDVSA board has full authority to name new PDV Holding and Citgo boards—based on the Trump administration’s recogniton of Guaidó as Venezuela’s president.”