Caracas clings to Citgo with Crystallex deal: Update

Adds comment on appeal, Citgo detail.

Venezuela has paid $425mn to retain its US refining subsidiary Citgo but could still lose the asset to auction next year, according to Canadian and US court filings.

A court-approved amended settlement agreement with former Canadian mining company Crystallex revealed in a 25 November Ontario Supreme Court of Justice report effectively suspended a US court process that imperiled Venezuelan control of its most valuable asset.

Crystallex received a substantial portion of the initial payment deposit on 1 October, mostly in the form of unspecified "liquid securities", according to the court report by the Canadian firm's bankruptcy monitor. The rest was paid in cash on 15 October and 23 November. The settlement requires additional Venezuelan payments through 2021.

But a process to auction shares in Citgo's indirect parent company PdV Holding (PDVH) could resume in January 2019 if the Opec country fails to post collateral for the remaining nearly $1bn due to Crystallex.

A US federal judge in August approved a path for Crystallex to auction shares of Delaware-based PDVH to satisfy $1.4bn in compensation and accrued interest for Venezuela's expropriation of the company's Las Cristinas gold mining project in Venezuela. The World Bank's International Centre for Settlement of Investment Disputes (Icsid) issued the award in April 2016.

The August order included a temporary stay and the opportunity to post a bond and launch an appeal. A Third Circuit appeals court panel last week granted a petition to rehear arguments on whether the holding company was immune from the auction process Crystallex sought. Crystallex emphasized its continuing lien on the holding company shares in a statement on the appeal.

"The Third Circuit decision was procedural and does not impact the merits of the appeal," the company said.

The deal is the second settlement reached by Caracas since August, when PdV agreed to a $2bn settlement with US independent oil company ConocoPhillips over an outstanding arbitration award concerning Venezuela's 2007 takeover of the firm's local heavy oil assets. PdV agreed to an initial payment of up to $500mn, which was partly paid in the form of crude.

In a statement sent to Argus, Crystallex chief executive Bob Fung said the company was pleased with the latest step in "a difficult and prolonged legal process."

Venezuelan national oil company PdV and Citgo representatives did not comment on the settlement with Crystallex.

Venezuela and PdV are still mired in outstanding debt. PdV paid $949mn in principal and interest in late October on a 2020 bond, Venezuela's only debt issuance not currently in default. The bond is backed by 50.1pc of the shares in PDVH, a pledge that had put the bondholders at odds with Crystallex. The other 49.9pc of PDVH is pledged to Russia's state-controlled Rosneft for separate oil-backed credit.

The PdV 2020 bond payment, together with the settlement with ConocoPhillips and the newly revealed settlement with Crystallex, points to the Venezuelan government's repeated success in last-minute maneuvering out of legal cases that threaten its strategic assets, in spite of dwindling oil revenue. Venezuela is currently producing around 1.1mn b/d of crude, down by around 700,000 b/d from a year ago, and a third of its 1990s level. As the ConocoPhillips and Crystallex settlements show, Venezuela is resorting to in-kind payments to meet these settlement obligations, further eroding cash-generating oil revenue.

Its Citgo subsidiary, meanwhile, operates 750,000 b/d of well-positioned complex refining and logistics assets. The company's 167,000 b/d refinery in Lemont, Illinois, processes deeply discounted Canadian heavy crude. The 157,500 b/d Corpus Christi, Texas, refinery sits at the end of a widening spigot of Permian-produced crude seeking larger markets. And its 425,000 b/d refinery in Lake Charles, Louisiana, is the third-largest in a state boasting 18pc of all US refining capacity.

The Crystallex settlement increases pressure on bondholders still carrying more than $60bn in combined delinquent debt issued by the Venezuelan government, PdV and state-owned Electricidad de Caracas. So far this group, including leading institutional investors, has been sidelined in spite of its calls for a fair negotiated settlement among all of Venezuela's creditors.