Trump’s Venezuela options complicated by US refiner

A US subsidiary of Venezuela’s PDVSA that has been used as collateral for a Russian loan has emerged as a stumbling block to Washington’s moves to impose additional sanctions on Caracas, including a possible ban on US imports of Venezuelan oil.

US president Donald Trump last week promised strong action as Nicolás Maduro, his Venezuelan counterpart, prepared to sideline his country’s opposition-controlled parliament. But a wrangle over the ownership of Citgo, the PDVSA subsidiary that has three refineries and about 6,000 service stations in the US, could complicate Washington’s calculations, analysts say. This follows reports of a deal between Rosneft, the Russian national oil company, and Caracas that involves the refiner. Citgo and other US refineries on the Gulf Coast are among the last remaining cash buyers of Venezuelan crude. They are also a vital source of petroleum products for Venezuela’s debilitated domestic refineries. This has made the Maduro government dependent on the oil trade with the US for its economic survival. “People may be surprised to learn that the US has been financing the Maduro administration,” said Russ Dallen of Caracas Capital, an investment bank. This aligns Russia’s economic interests with the survival of the Maduro regime.

Venezuela’s national oil company, before the country’s socialist revolution was launched by former president Hugo Chávez in 1999. Last year - following the oil price collapse and the country’s descent into chaos under Mr Maduro - Citgo was offered as security to PDVSA’s creditors: 49.9% as collateral for a $2bn loan from Rosneft and 50.1% as a guarantee for bondholders. Steven Mnuchin, US Treasury secretary, has promised an inquiry into Citgo’s ownership by the Committee on Foreign Investment in the US (Cfius) that could force PDVSA to sell it. Analysts say a change of control or other restriction on Citgo’s exports are under consideration in Washington, as the US and other regional governments become alarmed by increasingly brutal repression in Venezuela, as well as Mr Maduro’s plan to elect a “constituent assembly” on July 30 that critics say would complete the government’s transition to dictatorship.

Mr Dallen - who recommended a Cfius inquiry into Citgo to the US House of Representatives Committee on Foreign Affairs at a hearing on Venezuela in March - says Citgo is the only supplier to Venezuela still willing to offer credit, while other suppliers have refused to unload cargoes until payment is received. Satellite information shows ships experiencing long delays off the coast of Venezuela. Last month, a ship chartered by BP left Venezuelan waters after two months without unloading. Any disruption to supplies from Citgo would add severe strain to PDVSA’s struggling operations. But a Reuters report last week, if confirmed, would make it harder for Washington to use Citgo as leverage on Mr Maduro. It said Rosneft was negotiating with PDVSA to swap its interest in Citgo for other assets, including new stakes in Venezuelan oilfields and the right to sell Venezuelan oil itself rather than going through PDVSA. Rosneft and Citgo declined to comment. Luisa Palacios, oil industry analyst at Medley Global Advisors, a consultancy owned by the Financial Times, said the report was credible and that the deal would change the geopolitics of Russia’s involvement in Venezuela. “This aligns Russia’s economic interests with the survival of the Maduro regime,” she said. “It adds a degree of complexity at the diplomatic level that was not expected in Washington.” Parts of the deal would allow Rosneft to acquire Venezuelan assets, including fields developed by international oil companies such as ConocoPhillips of the US, at knockdown prices. Other elements of the deal, such as the right to sell oil itself, would require changes to Venezuela’s constitution, adding to the incentives for Mr Maduro to stick to his plans for a constituent assembly, which would supersede the opposition-controlled parliament. Washington’s efforts to derail those plans would clash directly with Moscow’s interests. Ms Palacios said Washington would have to think again about the “nuclear option” of restricting US imports of Venezuelan crude. “No sanctions are coming before July 30,” she said. “That would be idiotic. If there is any chance of negotiating, you kill it by sanctioning. They will wait and then begin by targeting individuals or doing something on the financing side.”

Mr Dallen said Rosneft would be keen to buy Venezuelan assets on the cheap, adding that the Maduro government had already ignored the constitution by conceding shares in joint ventures beyond the 40% legal maximum. “Rosneft has very good legal advisers,” he said. “They won’t get into anything that won’t stick. But they don’t mind putting a finger in America’s eye.” For the embattled Maduro administration, the prospect of such a deal holds out the hope of survival, he added. “The point is, they need the money,” Mr Dallen said. “Their only way out of the freaking mess they are in is to get oil production up.“

Source: Jonathan Wheatley for the Financial Times