Venezuela Reaches Settlement with Crystallex as Oil Production Further Tumbles

Caracas is looking to shield CITGO assets from seizure.

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CITGO refinery in Corpus Christi, Texas. (CITGO)
CITGO refinery in Corpus Christi, Texas. (CITGO)
By Ricardo Vaz
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Pays de Gex, France, November 28, 2018 (venezuelanalysis.com) – Venezuelan authorities reached an agreement with Canadian mining company Crystallex to settle a US $1.2 billion arbitration award, which has accrued a further $200 million in interest.

The settlement, announced on Monday, included an initial payment of $425 million, with Venezuela required to pay the remaining amount in installments by early 2021. The agreement puts the assets of CITGO, the US-based subsidiary of Venezuelan state oil company PDVSA, out of peril.

Crystallex had been pushing for a court-ordered auction of CITGO, valued at $11 billion, as a way of collecting the awarded compensation.

The legal dispute stems from a 2008 nationalization of Las Cristinas gold mine, in Bolivar State. The Canadian mining giant was later awarded $1.2 billion in compensation by a World Bank arbitration tribunal in 2016.

CITGO is widely considered the crown jewel of PDVSA, and Venezuela has fought to stave off US-based legal efforts to seize the firm as compensation for non-payment of sovereign bonds and arbitration awards. Despite sanctions severely crippling Caracas’ ability to service and renegotiate debt, payments of bonds secured by CITGO shares have been prioritized. CITGO shares have often been used as collateral for debt, with 49.9 percent of its shares being collateralized for a US $1.5 billion loan from Russian oil firm Rosneft in late 2016.

The Bolivarian government under former President Hugo Chavez moved to assert control over its oil industry and natural resources in general, often resulting in conflicts with multinational corporations. In another recent case, US oil giant ConocoPhillips moved to seize PDVSA tankers and assets in the Caribbean after the International Chamber of Commerce awarded it US $2 billion in compensation for a 2007 expropriation.

Oil production downturn continues

While fears over CITGO have been allayed for the time being, Venezuela’s oil output continues its downward descent.

According to OPEC’s Monthly Oil Report, Venezuelan oil production, as reported by secondary sources, fell by 40 thousand barrels per day (bpd) from September to 1.171 million bpd in October. This brings the decline in crude output to roughly 700 thousand bpd over the past 12 months.

Venezuela’s direct communication of production levels to OPEC showed a smaller decrease, with output at 1.4 million bpd in October. Venezuelan officials have previously claimed that OPEC data does not take into account all oil production.

Analysts have attributed Venezuela’s collapsing output levels in part to the impact of US financial sanctions which effectively shut PDVSA out of global credit markets while at the same time preventing the firm from repatriating US $1 billion in annual CITGO dividends.

Venezuelan Oil Minister Manuel Quevedo told press during the OPEC ministerial meeting in Abu Dhabi last month that production had stabilized around 1.5 million bpd. He also added that the government is aiming to raise production by 1 million bpd by the end of 2019.

Oil prices have also fallen significantly in recent weeks, from a four year high of $84 per barrel in early October to around $60 at the time of writing, as OPEC members consider reducing supply to push prices back up.

Oil giants target Venezuelan gas

Despite pressure from falling prices and output, Reuters reported on Monday that Venezuela’s oil ministry rejected BP’s proposal to buy Total’s share in a natural gas project along Venezuela’s maritime border with Trinidad and Tobago. While the transaction is between foreign transnational corporations, it still requires approval from Venezuelan authorities.

The venture in question is located in the Deltana Platform off of Venezuela’s east coast, and BP owns the rights to the Trinidadian side of the block.

Oil giants such as BP and Shell, which have natural gas operations in Trinidad and Tobago, have been eyeing Venezuela’s extensive, and largely untapped gas reserves, particularly in the Mariscal Sucre offshore field.

Venezuela signed an agreement in August to export gas from this field to Trinidad, but specifics on the project have yet to be announced.

Edited by Lucas Koerner from Caracas.