Venezuela: New Corporations to Claim Citgo Shares Following ‘Alter Ego’ Ruling

Caracas, July 9, 2023 (venezuelanalysis.com) – Six corporations are set to join a court-ordered auction of CITGO shares following a recent judicial ruling.

On Friday, the Third Circuit concluded that Venezuela’s state oil company PDVSA is the country’s “alter ego,” and thus liable for its debts. The measure exposes PDVSA’s US-based subsidiary CITGO to corporations looking to enforce international arbitration awards over assets nationalized by the Venezuelan state.

The court confirmed an earlier ruling from a Delaware District Court, rejecting an appeal from the Venezuelan opposition-control ad hoc PDVSA board that argued that the country’s “political turmoil” should warrant an outcome different than a 2019 decision that established the alter ego.

“Because reviewing PDVSA’s other arguments would stretch the limited grant of our appellate jurisdiction […] we decline the invitation and will affirm the district court’s judgment,” the Third Circuit’s three-judge panel stated. It is unknown at the time whether there will be a further appeal filed before the Supreme Court.

In his March ruling, Delaware District Judge Leonard P. Stark pointed to the Guaidó-led opposition’s management of CITGO as evidence of the alter ego.

Following the opposition politician’s self-proclamation in January 2019, the Trump administration seized Venezuela’s US-based refiner and placed it under the control of the so-called “interim government.” Though the latter has since dissolved, CITGO remains under the management of an opposition-appointed board.

The 2019 alter ego ruling allowed Canadian miner Crystallex to pursue a seizure of CITGO shares as compensation for $1.4 billion in compensation awarded by the World Bank’s International Center for Settlement of Investment Disputes (ICSID) in 2016 for the 2008 nationalization of a gold mine in Venezuela.

In October 2022, Stark set in motion a court-ordered auction of CITGO shares to settle the outstanding $1 billion of Crystallex’s debt as well as $1.3 billion owed as part of a $2 billion award granted by the International Chamber of Commerce (ICC) to oil firm ConocoPhillips. The judge will decide in late July on a proposed schedule that will see a court-appointed “special master” seek offers beginning in September and a final sale wrapped up in mid-2024.

The Third Circuit verdict is expected to allow six other corporations to tag their international arbitration awards to the ongoing auction process. The largest are Rusoro Mining and Gold Reserve, which are owed $1.8 billion and $1.0 billion, respectively. The other claimants are Koch Minerals ($467 million), O-I Glass ($457 million), Huntington Ingalls ($145 million) and ACL1 Investments ($123 million). The amounts, which include accrued interest, total $4 billion.

Any final sale would be contingent on approval from US authorities. However, the Treasury’s Office of Foreign Assets Control (OFAC) has promised to implement a “favorable licensing policy.”

Simultaneously, according to reports, the present CITGO board is engaged in settlement talks with Crystallex, ConocoPhillips and holders of the defaulted PDVSA 2020 bond, to which 50.1 percent of shares belonging to PDV Holding, CITGO’s parent company, were pledged as collateral.

Transactions involving the PDVSA 2020 bond are currently banned by the US Treasury Department, but the order expires in July.

Board head Horacio Medina affirmed that “offers and counteroffers have been presented.” However, the defunct opposition-controlled parliament that theoretically oversees CITGO has offered no public statements concerning an eventual strategy to defend Venezuela’s most prized foreign asset. In April, it received a US Treasury license allowing it.

Reuters likewise reported a proposal by the Medina board to use 200,000 daily barrels of oil exports to create a fund to be used to repay creditors. The plan would require permission from the US Treasury Department which has levied wide-reaching sanctions against Venezuela’s oil industry since 2017.

The Nicolás Maduro government has not acknowledged or commented on the proposal. The country’s executive has repeatedly pointed the finger at the US-backed hardline opposition for its actions jeopardizing CITGO and orchestrating the “theft of the century.” It has stated that it will not recognize any agreements with creditors and demanded the return of CITGO to Venezuelan state control.

The Guaidó camp has faced accusations of collusion and malpractice regarding its handling of foreign assets. Juan Ignacio Hernández was a key expert for the original alter ego verdict, only to be later appointed “special prosecutor” in charge of foreign assets.

Apart from the PDVSA 2020 bondholders and the court auction claimants, CITGO could also soon be jeopardized by a massive $8.7 billion ICSID award won by ConocoPhillips. Though the grant is still undergoing an appeals process, the US oil giant won a default ruling to enforce the award after lawyers from the “interim government” failed to appear in court for more than a year.