| FROM strafor.com
Global Market Brief: Feb. 7, 2005
Venezuelan President Hugo Chavez said recently in Argentina that Petroleos
de Venezuela SA (PDVSA) would sell its assets in Citgo Petroleum within two
years. Chavez also said that he was "tired of subsidizing the Bush
administration" with cheap gasoline through Citgo.
Citgo is one of the five largest branded gasoline suppliers in the United
States with a roughly 7 percent share of the U.S. gasoline market. Citgo´s
most recent annual statement in 2003 said the company's total refining
capacity is 865,000 barrels per day. If Chavez does move to sell Citgo and
PDVSA´s other refineries in the United States, it could generate a windfall
profit for the Chavez government. However, it also would strip PDVSA of its
highest value-added subsidiary and leave it completely open to the booms and
busts of the energy markets.
Chavez's decision to sell Citgo forms part of a greater political strategy
of removing Venezuela from the U.S. sphere of political and economic
influence. Chavez sees the United States as the greatest potential threat
both to Venezuela's national security and the stability of his government,
which could last until 2013 if Chavez is re-elected at the end of 2006.
Chavez's goal over the next five-to-10 years is to build new oil-based
alliances with countries like China, Russia and India in order to continue
expanding Venezuela's oil industry with minimal U.S. involvement.
After declaring that Citgo would be sold, Chavez appointed Felix Rodriguez,
vice president of PDVSA´s upstream operations in Caracas, to head
Houston-based Citgo. Rodriguez is a strong proponent of greater government
control over the oil and natural gas industries. However, in his first
official statement as Citgo´s new chief executive officer, Rodriguez
declared that no decision has been made to sell any part of Citgo.
These contradictory remarks reflect serious differences of opinion within
the Chavez government over the strategic importance of maintaining both a
strong downstream presence internationally for PDVSA, and a major Venezuelan
equity stake in the U.S. oil market. However, the final decision will be
made exclusively by Chavez, who has stated repeatedly since the mid-1990s
that PDVSA should divest itself of Citgo and its other international assets.
We think that Chavez will overrule internal resistance to selling Citgo.
This raises several questions. For example, how much is Citgo worth? Will
Citgo be broken up and sold in separate units, or offered for sale as a
single entity? Who are the likeliest potential buyers? Would Chavez give
preference in selling Citgo to investors from countries that Caracas
considers strategic partners -- like China or Russia? Where would Citgo's
future owners buy their sulphur-rich crude oil if Venezuela stops exporting
oil to the U.S.? What other PDVSA assets overseas might be sold besides
Citgo?
Citgo had total assets of roughly $8 billion as of Sept. 30, 2004, including
refineries in Lake Charles, La., Corpus Christi, Texas, Paulsboro, N.J., and
Savannah, Ga. Citgo also owns 41 percent of Houston-based Lyondell-Citgo in
a joint partnership with Lyondell Chemical Co.
Citgo also owns part of three crude oil pipeline companies and six refined
product pipeline companies including Colonial Pipeline, which is the largest
refined products pipeline in the United States. For the year ended Dec. 31,
2003, Citgo reported net sales $25.2 billion, net income of $439 million and
earnings of $1.1 billion before interest, taxes, depreciation and
amortization (EBITDA).
Chavez said in Buenos Aires that PDVSA would sell eight refineries in the
United States. This indicates that besides selling Citgo, PDVSA also would
sell its interests in three other U.S. refineries, including PDV Midwest
Refining L.L.C. in Lemont, Ill., which is 100 percent owned by PDVSA. The
other two refineries are Chalmette Refining in Chalmette, La., a joint
venture with Exxon Mobil in which PDVSA has a 50 percent interest; and the
Hovensa refinery in Saint Croix, U.S. Virgin Islands, in which PDVSA is
equal partners with New York-based Amerada Hess.
PDVSA also is full or part-owner of nine refineries in Germany, Sweden,
Belgium, Scotland and England. Its European partners include Germany's Veba
Oel and Sweden's Fortum Oil and Gas OY. Chavez has not said whether he plans
to sell PDVSA's European assets. However, about three years ago the Chavez
government tried unsuccessfully to sell its stake in four German refineries
that are co-owned by Veba Oel to Russian investors.
Although the book value of Citgo's assets is $8 billion, some Caracas-based
analysts think Citgo's market value could easily top $16 billion -- assuming
that the future buyers have guaranteed oil supplies. However, we think that
uncertainty about the long-term oil supply outlook for Citgo likely would
dampen investor enthusiasm and reduce its market value significantly.
Citgo's refineries are engineered to process sulphur-laden Venezuelan heavy
crudes. If Chavez eventually suspends oil exports to the United States,
Citgo's new owners would have to find alternative supplies. These could come
from Russia, Saudi Arabia or Mexico. However, while some Russian and Saudi
crude oil contains a lot of sulphur, it is not as heavy as the Venezuelan
crudes that Citgo's refineries are engineered to process.
Mexico is the only crude supplier comparable to Venezuela in terms of
geographic location and the specific gravity of its heavy crudes. However,
Mexico's state-owned oil company Petroleos Mexicanos (Pemex) is currently at
risk of losing production capacity in coming years because high taxes and
the Mexican government's refusal to open the country's upstream sectors to
private exploration and production investment are crippling the industry's
capacity to expand its output capacity.
Even if oil supplies are secured long term for Citgo, the company's new
owners still would likely be obliged to invest substantial sums in refitting
the refineries to handle new non-Venezuelan crude oil supplies with maximum
efficiency.
Its possible that Lyondell Chemical Co. could buy PDVSA's 41 percent stake
in its Houston refinery, and subsequently seek another partner with heavy
crude supply capabilities. Lyondell-Citgo sources are reluctant to discuss
that possibility.
Officials with Valero Energy Corp. said Feb. 2 that their San Antonio,
Texas-based company, which accounts for about 15 percent of U.S. refining
capacity, would be interested in buying if Citgo´s refineries are sold.
Spokeswoman Mary Rose Brown said Valero is "always looking at potential
acquisitions."
Valero officials said the company would be interested in buying PDVSA´s
refinery in Lemont outside Chicago because it is supplied with low-cost
Canadian crude and therefore is not vulnerable to the political whims of the
Chavez government.
Valero also would be interested in owning Citgo´s refinery at Lake Charles,
which is very near Valero´s Lake Charles refinery. However, Valero officials
think the U.S. Federal Trade Commission likely would not approve the sale of
Citgo's Corpus Christi refinery to Valero because it serves similar markets
to the Citgo and Valero refineries in Lake Charles.
Chavez might consider selling all or part of Citgo to buyers from countries
with which Venezuela has strategic political alliances, like China and
Russia. However, we do not think Russian or Chinese companies will join a
potential race to buy part or all of Citgo's U.S. assets.
LUKoil is the only Russian firm that has made a major investment in the
United States -- when it bought out the Getty family's petroleum interests.
Also, LUKoil's business plans place heavy emphasis on linking oil supplies
to their refineries. This means Russian companies likely would demand
iron-clad long-term supply agreements from Venezuela before they would
seriously consider buying PDVSA assets in the United States dedicated to
processing Venezuelan crude. Moreover, LUKoil has no prior experience
managing and processing heavy crudes.
We are not saying that LUKoil or another Russian company might not consider
buying Citgo. However, it likely would take much longer than two years
before a deal could be finalized transferring Citgo to Russian ownership.
China has a history of making investments that are not profitable when
Chinese national interests are advanced by making such investments. However,
we doubt that any Chinese companies would bid for Citgo. The Chinese have
minimal interest in the U.S. oil and gas market. Also, they want Venezuela's
crude oil to fuel development of China's economy, not supply another market.
That probably leaves British Petroleum, in addition to Valero Energy, as one
of the more likely buyers for a portion of Citgo's assets. However, the
Federal Energy Regulatory Commission probably would not allow BP to buy all
of Citgo.
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