Venezuela’s PDVSA Discusses Sale of Citgo as Central Bank Reports Drop in Inflation

Santa Elena de Uairen. September 10th, 2014. (venezuelanalysis.com) –  Yesterday the Venezuelan Central Bank reported that inflation has dropped steadily from 5.7% in May of 2014 to 3.9% in the month of August, representing 63.4% accumulated inflation since August of last year. Now under new management, state-owned oil and gas company PDVSA is reportedly seeking US$10 billion dollars for the sale of the Citgo Petroleum Corporation.

Since August 2013, the area hardest hit by inflation has been food and nonalcoholic beverages, at an accumulated 91%. Cigarettes and alcohol follow close behind at 83.7%, while restaurants and hotels saw an 80.3% rise, and home utilities (excluding telephone services) rose by 55%. Culture and leisure activities saw a 49.6% increase, transportation costs increased by 49.6% and clothing and shoes averaged a 45.8% rise.

The Central Bank’s report confirmed what many Venezuelans already suspected, that the 30% minimum salary raise in April could not outpace the rising cost of living, which has escalated by 39% since January 2014. However, president Maduro indicated last month that another wage increase may be set for November. 

The Venezuelan leader also said last week, before the official data was revealed to the public, “I am very optimistic about this pattern: June, July and August’s numbers begin to be positive and mark an important decrease in inflation. 

According to Reuters, anonymous sources claim investment bank Lazard Ltd (LAZ.N) is currently running the sale process for Citgo on behalf of PDVSA, who hope to receive US$10 billion for the company.

While many publications have referred to the deal as a fire sale and Venezuelan critics accuse the government of raspando la olla, or scraping the bottom of the pot to pay off debtors, the sale may have more to do with a number of arbitration cases being processed against Venezuela by the World Bank’s International Center for Settlement of Investment Disputes (ICSID).

Of 23 currently open cases, 15 claims against Venezuela were presented in 2011-2012 though the ICSID, shortly after a series of expropriations of transnational oil companies led by Hugo Chavez. The two largest multi-billion dollar claims were filed by ConocoPhillips and ExxonMobile, the latter of which has received US$907 million in compensation but continues to demand more. The ICSID panel ruled last year that ConocoPhillips is also due reparations, but have yet to specify what the value of those are. The US oil company has insisted on 30 billion.

Before the cases are contested in United States courts, some analysts believe Venezuela is preferring to sell their most easily seized asset on US soil – refinery giant Citgo, property of PDVSA since 1990. 

In July, former PDVSA president Rafael Ramirez told journalists, “the moment we receive a proposal convenient to our interests, we will get rid of Citgo,” while indicating that any negotiation of sale must ensure PDVSA’s role as supplier. 

After president Maduro’s 2 September cabinet upheaval removed Ramirez from PDVSA, Venezuelan bonds plummeted, with PDVSA bonds falling over 10 points in six days. 

Ramirez was considered one of Venezuela’s most prominent proponents for pushing the country’s economy back to neoliberalism; his removal has been widely viewed as a step away from the changes in policy US investors were hoping for. 

On Monday, the average yield on Venezuelan bonds rose to 14.42 percent, resulting in the cost of insuring Venezuelan debt ring past even that of Argentina. 

While some analysts, such as Harvard economist and pre-Chavez era Venezuelan minister Ricardo Hausmann, fanned the flames by casting doubt on Maduro’s ability to pay an estimated 4.5 billion in debts due this October, other financial institutions such as Bank of America and Barclays capital seemed undaunted. 

In a 5 September note to clients, Bank of America economist Francisco Rodriguez wrote, “Venezuela has more than enough foreign currency earnings to both ensure an adequate supply of imports and meet its foreign obligations.”

This morning things took a turn for the better as investors decided to take advantage of the low priced bonds, thereby helping stabilize their trade value. 

Incidentally, the newly appointed PDVSA president Eugenio Del Pino has appealed to investors. With a master’s degree in exploration from Stanford University, Del Pino was second-in-command to Ramirez, as the Exploration and Production Vice-President. 

Luisa Palacios of Medley Global Advisors told Bloomberg on Thursday, ““The person that knows the most about production at PDVSA is now the head of PDVSA. That should mean that the downside risk to production has declined.”

According to a PDVSA statement released yesterday, the company has signed a financing agreement with an unnamed international lender for about half of a project valued at $3 billion to expand the Puerto La Cruz refinery in eastern Venezuela.

The company aims to increase the refinery’s capacity to 180,000 barrels a day to cover national and export demand for products including gasoline, jet fuel and diesel.

Since Del Pino will not hold the additional role formerly occupied by Ramirez as economic vice-president, Wall St. will have to look at the newly appointed Rodolfo Marco Torres for any hints of neoliberal reform.