Venezuela's Scrutiny of Citgo and Overseas Oil Operations is Driven by Economics, Officials Say

The scrutiny of the international operations of Venezuela's state oil giant Pdvsa are not motivated by politics but by economic factors, according to Venezuelan officials and some oil analysts.

By Cleto Sojo - Venezuelanalysis.com
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CITGO Venezuela gas station
Citgo's expansion plans have been placed on hold while the company is under scrutiny.
Photo: Venezuelanalysis.com.

Caracas, Venezuela. Feb 11, 2005 (Venezuelanalysis.com).- The scrutiny of the international operations of Venezuela's state oil giant Pdvsa are motivated by economics, not politics, according to Venezuelan officials and some oil analysts.

After losing about 14 billion U.S. dollars during the work stoppage and sabotage of the company, sponsored by top executives aimed at ousting President Hugo Chavez at the end of 2002, Pdvsa has been reviewing its international operations under the suspicion that the former executives made several deals driven by personal gains instead of by the company's or country's benefit.

After emphasizing that the evaluation of Pdvsa's operations abroad has no political overtones, Oil Minister Rafael Ramirez told Venezuelan daily El Universal that in the past "there was a deliberate pattern of acquiring assets overseas in order to reduce the government's fiscal control on very important Pdvsa activities.” He added that under such scheme, almost 48% of the company's assets abroad are beyond the control of the Venezuelan government and subject to tight regulations by third countries. He cited the case of the Ruhr Oil refinery in Germany in which Pdvsa has a 50% stake, but little control over its money losing processing of Russian oil.

Ramirez suggested that some past actions by company executives had a clear political motive: privatization. He added that past Pdvsa accounting methods allowed partners to artificially boost costs while charging Pdvsa for it. “We are revising costs. They even included their overseas personnel and charged Pdvsa for it. There was a clear political orientation to hand over production to third parties in concrete terms. Since the law did not allow it, they looked for cracks through which they introduced the Trojan horse of privatization, and with a strategy to avoid taxes, which made things even worse,” he said.

But the rumors of a possible sale of Citgo Corporation, Pdvsa's U.S. refining and distribution arm, has led critics of President Chavez to argue that politics, not economics, is behind Venezuela's oil decisions. Chavez and the Bush Administration have been at odds since the 2002 coup d'etat against the Venezuelan leader, which the U.S. allegedly supported, according to scattered evidence. U.S. officials frequently criticize Chavez's collaboration with Cuba, his domestic policies, and question his commitment to democracy in spite of the nine consecutive electoral victories by him, his political supporters or his political project through several elections and referenda. Chavez's recent denunciation of the U.S. aggressive foreign policy as "imperialist", and accusations by Washington of him being "a negative force in the region," and of supporting Colombian guerrillas, has heated the confrontations even more.

The rumors began circulating after Chavez visited Argentina in January, where Pdvsa entered in a joint venture with Argentina's state oil company to develop a gasoline distribution network. Chavez has pushed for Latin American integration to oppose U.S. economic and political domination in the region. He has called for the creation of an alternative to the Free Trade Agreement of the Americas, the expansion of the Mercosur trading block, the creation of a Latin American oil multinational (PetroAmerica), and the creation of a Latin American satellite TV network (TeleSur).

Chavez echoed some analysts’ assertions that Venezuela is subsidizing its oil exports to the U.S., which according to him, end up supporting the Bush administration. "We are subsidizing Mr. Bush," the leftist President said in reference to agreements under which Citgo receives crude from Pdvsa at below market prices thanks to long term supplying contracts. He went on to criticize PDVSA's European holdings by saying that "not one Venezuelan works at these refineries... They don't give us 1 cent of their profit. They don't pay taxes in Venezuela. This is economic imperialism."

The President has made no secret of his goal to decrease Venezuela's exclusive economic dependency on the United States market. He claims to be promoting the utilization of the country's natural resources, especially oil, for the country's industrial and agricultural development and for social programs for the poor. To help raise more money for his programs, the leader has not only ordered the review of Pdvsa's international money-losing operations, but the government has raised the royalties paid by foreign multinationals operating in Venezuela, and Pdvsa is reviewing the terms of several existing contracts with those corporations.

CITGO CEO Felix Rodriguez
Citgo's CEO Felix Rodriguez said that no decision to sell the company has been made.
Photo: PDVSA.

Citgo under scrutiny, not for sale

Chavez's comments and "unnamed government sources" cited by some media outlets have been used to assert that he is seeking to sell Citgo and stop the supply of oil to the United States. Chavez has said in the past that the flow of oil to the U.S. would be cut if the U.S. imposes economic sanctions or tries to invade Venezuela.

The speculation and rumors prompted the U.S. Senate to request last month a study of the possible impact of a total cutoff of Venezuelan supplies.

Citgo's new President and CEO, Felix Rodriguez, as well as Pdvsa president and Minister of Energy and Petroleum Rafael Ramirez, have denied rumors of an imminent sale of Citgo, arguing that no decision has been made.

Venezuelan Minister of Information Andres Izarra denied that Chavez had ordered the sale of Citgo, and said that the President has only highlighted the fact that Venezuela loses money or gains very little from the ownership and operation of some refineries abroad.

Citgo's CEO Felix Rodriguez said that no decision to sell the company has been made. "Sale is a decision considered in any type of business," Rodriguez said recently in an interview with Venezuelan daily Panorama. "The review of Citgo's assets hasn't been finished, and there are many aspects to review. This is a business in which each refinery must be analyzed, up until now, we have only advanced in the evaluation of costs," Rodriguez said.

Pdvsa president Ramirez told El Universal that Citgo's expansion plans have been placed on hold, including the acquisition of a refinery on behalf of Citgo Asphalt, until certain issues such as Pdvsa's discounts on crude sold to Citgo, tax payments on U.S. soil, dividend repatriation, the use of Venezuelan personnel at Citgo, etc., have been fully resolved. He mentioned the existence of talks with the U.S. government regarding the possibility that Citgo could pay taxes in Venezuela.

Ramirez said that in 2004, Citgo repatriated $400 million in dividends. He mentioned that a Venezuelan firm would participate in Citgo's auditing process and that Venezuelan personnel would continue to be assigned to operations in the U.S.

The Minister also said that future actions by Pdvsa will include investment in the refineries abroad, so that they can process more Venezuelan crude.

When asked about the sale of the money losing Ruhr Oel refinery in Germany in which Pdvsa has a 50% share, Ramirez said they have an acceptable offer as part of a mixed proposal by BP and a Russian firm.

Regarding discounts on Venezuelan crude sales to Citgo -between $1.50 and $2 per barrel- Ramirez told El Universal that this practice affected Pdvsa's royalty payments amounting $7.5 billion dollars since 1983. "It doesn’t make any sense that Venezuela, a country with profound social problems, ends up subsidizing the economies of industrialized nations."

Under an agreement to avoid double taxation between the two countries, Citgo only pays income tax in U.S. soil, causing Venezuela to lose around $100 million a year it would otherwise get from Citgo. "Citgo does not report those discounts [on oil sold by Pdvsa]. Therefore, it is reporting non accurate earnings in the U.S., which is not illegal under U.S. laws, because they are in fact overpaying," he said.

Ramirez explained that Pdvsa's acquisition of refineries overseas was made under the premise that Venezuelan crude would have a secured market. However, half of those refineries do not process Venezuelan crude, which results in annual purchases of oil from third parties worth $18 billion. In this matter, the ongoing evaluation of these refineries will make emphasis on those which do not process Venezuelan crude.

According to Ramirez, Pdvsa's direct investments abroad amount to $10 billion, "and if we add the $7.5 billion given in discounts we arrive to almost $20 billion with a return of less than 10%."

Oil expert Rafael Quiroz was quoted recently saying that Citgo's sale would be a step in the right direction. "The purchase of Citgo [by Pdvsa in the 80's]was deceitful, and it converted Venezuela into the main individual purchaser of Mexican crude for ten years," Quiroz said. He suggests that Pdvsa should sell Citgo's refineries that do not process Venezuelan crude and progressively eliminate the discounts given to Citgo.

Only new production for non U.S. markets

Venezuela's recent oil, gas, mining, and technology agreements with China, have fueled the rumors of cuts of crude sales to the U.S. Chavez opponents and some media outlets wrongly report that Pdvsa is selling crude to China, a charge that Venezuelan officials denied saying that only fuel oil and Orimulsion (a fuel for electrical plants) are being provided to China under those agreements. According to Pdvsa officials, only increased oil production, which is expected to double by 2009, will be destined to new markets, and that the U.S. will not suffer any cuts.

Venezuela's populist leader has been accused before of letting politics drive his country's oil policy in detriment of economic gains. Faced with very low oil prices at the time he took office, Chavez went on to visit OPEC countries in an effort to promote the cartel members' lost discipline of sticking to its quotas, in order to drive prices up. His meetings with Iraq's Saddam Hussein and Libya’s Moammar Gadhafi, prompted opponents to accuse him of just playing politics, but the rebirth of OPEC, and with it, the recovery of oil prices, seem to indicate otherwise.

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