Venezuela faces loss of Citgo to Crystallex International

A Citgo oil refinery in Lemont, Illinois. Source: Getty Images.

Venezuela could lose its largest U.S. asset after a court allowed a Canadian gold miner to seize shares of Citgo Petroleum Corp.’s parent to satisfy an arbitration award.

A U.S. appeals court ruled on Monday that Crystallex International Corp. may seize U.S.-based stock of Citgo’s parent, which is part of Venezuela’s state-owned oil company, to cover a $1.4 billion award over the nationalization of gold fields.

“For too long Venezuela has refused to compensate Crystallex for its illegal seizure of Crystallex’s assets”

Bob Fung, Crystallex CEO

Unless reversed on appeal or blocked by the Trump administration, the decision would allow Crystallex to auction the shares to satisfy Venezuela’s unpaid debt to the Canadian company. That means the country, in the grip of its worst recession, could lose control of the refiner that processes Venezuelan crude into desperately needed hard currency.

It also complicates efforts by interim President Juan Guaido to retain control of Venezuelan assets including Citgo while waging a power struggle with current leader Nicolas Maduro for leadership of the country. Guaido has asked U.S. President Donald Trump to bar creditors from seizing the country’s assets.

“At this stage, the only action that could stop Venezuela from losing Citgo is either a successful U.S. Supreme Court appeal, which appears unlikely, or a decision by Trump to issue an asset-protection order as Guaido has been requesting,” Francisco Rodriguez, chief economist for Torino Capital, said in an interview.

“The UN can also help,” added lawmaker Rafael Guzman, part of the opposition-led National Assembly’s finance committee. “We are going to push for all of them.”

Guaido and Maduro are battling for control of Citgo by naming conflicting board nominees for its owner, Petroleos de Venezuela SA, or PDVSA. A state-court judge in Delaware will decide who has legal right to appoint directors for the state-run oil company, which owns Citgo.

Guaido himself didn’t immediately return calls for comment on the appeals court’s ruling, nor did Jose Ignacio Hernandez, Guaido’s special attorney general, who was appointed to oversee litigation worldwide. Officials of Maduro’s Information Ministry didn’t return calls for comment, either.

“For too long Venezuela has refused to compensate Crystallex for its illegal seizure of Crystallex’s assets,” Bob Fung, Crystallex’s CEO, said in an emailed statement. He added the court’s ruling was a “crucial step in getting Venezuela finally to honor its legal obligations.”

Venezuela’s crisis follows years of Maduro’s and ex-leader Hugo Chavez’s socialist economic policies and the collapse in the country’s all-important oil industry. Venezuelan officials are scrambling to keep their hands on Citgo to rebuild the economy.

Guaido, head of the country’s National Assembly, and Maduro, who has the support of the Venezuelan Army, have held talks in Oslo, Norway, seeking to resolve the crisis. The latest round of negotiations were scheduled to take place earlier this month in Barbados.

Crystallex’s gold mining operations near Las Cristinas, Venezuela, were seized without compensation in 2011 when Chavez nationalized the country’s gold-mining industry. The company pursued arbitration and won a $1.2 billion award plus interest in 2016.

Last year, Venezuela officials handed over $425 million as partial payment of the arbitration award, but the company couldn’t cut a deal to satisfy the rest of the debt. So Crystallex pushed ahead with efforts to seize shares of Citgo’s parent.

Crystallex officials waged a three-year battle to seize shares of PDV Holding Inc., which owns Citgo. PDVSA owns the holding company. A federal judge in Delaware concluded last year that since Venezuela controls PDVSA, shares of Citgo’s parent were fair game to be seized for the debt.

The Philadelphia-based appeals court upheld the trial judge’s finding that PDVSA is Venezuela’s alter ego in part because its run by the country’s military and all profits flow to the country’s coffers.|

Crystallex isn’t the only company that has sued Venezuela over unpaid debts

“It has the potential to be a big blow to Venezuela,” Russ Dallen, managing partner of Caracas Capital, said in an interview. “The pool of creditors that can now attack and go after PDVSA is greatly expanded.”

Crystallex isn’t the only company that has sued Venezuela over unpaid debts. Investors have sued over $65 billion in defaulted bonds while rival ConocoPhillips sued Venezuela over seizure of its oil assets in the country. The U.S. oil giant won a $2 billion arbitration award over the nationalized assets. Last year, ConocoPhillips executives got $345 million in cash and commodities in settlement after the U.S. company seized some PDVSA assets in the Caribbean.

The case is Crystallex International Corp. v. Bolivarian Republic of Venezuela, No. 18-2797, U.S. Court of Appeals for the Third Circuit (Philadelphia).

(By Jef Feeley, Bob Van Voris and Porter Wells, with assistance from Alex Vasquez)

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