Another little bit on Citgo

One more little bit about the possible sale of Citgo and other overseas assets. I hear anti-Chavistas now and then slam the idea of selling overseas assets as a giveaway or otherwise stupid.

These sales are pure profit. Venezuela bought the refineries cheap. Ruhr Oel, recently sold for $1.6 billion, was bought in 1983 for $250 million ($548 million in constant dollars), all of which is surely depreciated away. Explain to me again how it’s bad to cash out on an investment after tripling your money? I suspect that critics don’t really think selling Citgo is a bad idea. They just want the sale to wait so they and their pals can handle the billions of dollars in a more responsible manner — which in Venezuela is a euphemism for the money goes into my Miami condo, not yours.”

Citgo’s Corpus Christi refinery was bought in two parts for a total of $249 million. Lake Charles was $965 million. All of this money was spent in the 1980s, more than 20 years ago.

Some say Venezuela will lose an outlet for its crude. They ignore that when NuStar bought Citgo’s asphalt refineries, the new owner was very happy to sign a long-term supply contract with Venezuela. A refinery without crude isn’t very useful. There are other sources for heavy crudes, but PDVSA can certainly structure a sale to ensure that it keeps access to the U.S. market.

Even former PDVSA President Luis Giusti, who is no fan of Chavez, told me in an interview back in 2007 that it made sense to consider a sale of Citgo if the price was right.

Special note to the many new readers from Citgo: Thanks for visiting. You should feel comforted knowing that many of your coworkers have been visiting too. Any thoughts are welcome. Even if you just want to tell me I’m wrong. Your confidentiality assured, of course. One hint: if you do want to share anything confidential, do yourself a favor and don’t write from your work computer.

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6 thoughts on “Another little bit on Citgo

  1. Juan

    “… that it made sense to consider a sale of Citgo if the price was right.”

    That is the money quote. Managers of PDVSA should always be evaluating these decisions on such terms. The option to sell CITGO should have always been on the table. If the present value of the sale proceeds is greater than the present value of the free cashflow obtained from the project then selling is the only logical choice.

    However, I strongly doubt that the Ruhr refinery sale (for example) was decided upon in such terms.

  2. Daniel Olban

    what I am going to write next part is speculation and the rest is not but it might help us getting some insights.
    As of end 2009 Citgo had the following long term financial debt breakdown: (source: PDVSA’s Financials as of Dec 2009)
    – Credit Guarantee Facilities for $225 millions due in 2010.
    – Credit facility for $ 1.12 billions due in 2012.
    – Bonds exempted from Tax $ 587 millions due in 2043.
    – Guaranteed Credit line for $400 millions due 2010.
    – Bonds subject to Tax for $60 millions due in 2026
    – liabilities for other fianancial arrangements for $24 millions…..don’t know when they are due.

    This gives us a grand total of $2.4 billions. I am not financial expert, nor try to be one, but given the above I can see that $2.4 billions might not be such a big burden in comparison to Citgo’s total current or non-current assets…..Therefore, it might not look as if PDVSA has to wait 4/5 years to sell Citgo.

    In general terms, PDVSA sells 270,000 barrels/day to Cigo Lyondell (PDVSA’s stake already sold). 320,000 bbls/day are sold to Citgo’s Lake Charles Refinery and some other 160,000 bbls/day to Citgo’s Copus Christi, plus some spot sales of 250,000 bbls/day to Chalmette and Sweeney Refineries. This totals 750K to 1 million barrels per day committed to the US market (for how long?, do not know?)

    It is important to remember that Citgo and/or PDVSA might have some long term contracts for supply of oil/oil products. In this sense, PDVSA or Citgo would be compelled to honour such contacts before liquidating some assets…. Under such circumstances it might be necessary to wait a while, while such contracts come to expiry.

    Therefore, the sale of Citgo does not seem an immediate issue.

    In addition, it is necessary to mention that if ExxonMobil and/or Conocophillips wan the international arbitration they have on PDVSA, then Citgo’s assets would be “seizable” if PDVSA refuses to pay compensation. I wonder who would like to buy Citgo’s assets under such circumstances.

    According to PDVSA’s Financial Statements Dec 2009, PDVSA’s Property, Plants and Equipments in the US are worth $10.24 billions (depreciation not included yet)……And if I am not wrong ExxonMobi RECENTLY cut its Arbitration CLAIMS to $7 billions.

    Accordingly, as far as I can see, there are 4 important factors that may determine the sale of Citgo’s sale:

    a) PDVSA needs cash for:
    i) Keeping and increasing current oil production.
    ii) E&P activities in Venezuela such as Extra-heavy oil development in Orinoco Faja with Petrovietnam (Junin 2), CNPC (Junin 4), ENI (Junin 5) , The Russians (Junin 6), Carabobo 1 (Repsol and Indians, Carabobo 3 (Chevron and the Japanese), which are all supposed to have the first drops of oil in 2012…(elections)
    iii) Gas developments (Cardon 4 (ENI), Mariscal Sucre and Plataforma Deltana (Chevron))
    iv) to pay for the debt service contracted due to continual issuance of bonds and debt. Debt service would be around $8-$10 billions per year for some 5 to 6 years.

    b) PDVSA faces risks of seizure of assets for more than $7 billions.
    c) PDVSA’s oil commitments are increasing and they have not enough oil to honour them.

    Hence, it makes sense that Citgo’s assets (at least some of them ) be sold in the medium or long run.

  3. Daniel Olban

    I have to add an observation to the following parragraph “iv) to pay for the debt service contracted due to continual issuance of bonds and debt. Debt service would be around $8-$10 billions per year for some 5 to 6 years.”….. This debt service is Venezuela’s Sovereign plus PDVSA’s debt service.

    PDVSA’s debt service alone would hitherto stop in 2037. However the most important payments are to be done until 2015 approx. These would amount to approx: $3 billions in 2011, $0.7 Billions in 2012, $1 Billion in 2013, $3 Billion in 2014, $1 billion in 2015.

  4. Moraima

    “They just want the sale to wait so they and their pals can handle the billions of dollars in a more responsible manner — which in Venezuela is a euphemism for the money goes into my Miami condo, not yours.”
    We cannot deny that corruption has existed in Venezuela and it will still exist under an opposition government. It exists everywhere. But the level to which Chavez has squandered resources was not known in Venezuela. It they sell Citgo that money will go to buy more arms from Russia, give away oil to other countries, keep barely afloat privatized companies that were profitable on private hands and on and on you can go…
    So, no, the opposition does not oppose the sale just because they want the money for themselves. They do it because they know that the money from it will in no way benefit Venezuela if the sale is done under this government.

    1. sapitosetty Post author

      The point of my post was to examine the situation using dollar amounts and a normal M&A analysis, rather than looking at everything through a political lens. Your response exemplifies why.

      The total amount that Chavez’s government has spent on Russian arms purchases, aid to foreign governments and propping up nationalized companies in its 11 years in power is less than the amount that PDVSA spends on capital expenditures in a single year. I think it’s safe to assume that if Citgo is sold, most of the money will go to Orinoco Belt development, since that is where PDVSA needs money. Yes, of course some of it will be stolen and some will be diverted to things that any one person wouldn’t approve of. But let’s say they can get $10 billion for Citgo and half of it is used in ways that aren’t of “benefit” to Venezuela, as you put it. It is still probably worth it to sell. The cost of borrowing $5 billion for 10 years is higher then the amount of profit that is likely to be produced by Citgo in that time, and the cash that is sitting under the Orinoco Belt requires investment in order to be produced.

      To put it another way, if you oppose the sale of Citgo, how do you propose financing the new joint ventures?

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