Pdvsa, broke, leverages Citgo

Citgo Petroleum, Pdvsa’s wholly-owned US subsidiary, plans to issue $1.5b billion of new debt in June structured as senior secured notes due in 2017 and 2020.

Citgo estimates that net proceeds will come to $1.45 billion after costs and fees are subtracted.

Proceeds from the new debt issue, plus additional planned borrowing of up to $700 million in coming weeks, will be used to repay $1.8 billion of Citgo’s existing debt.

Citgo says that its total debt will be about $2.5 billion after this existing debt is repaid with the new debt.

Subject to certain restrictions, the senior secured notes will be secured by Citgo refining assets in Lake Charles, Louisiana; Lemont, Illinois; and, as of 2011, Corpus Christi, Texas.

The Citgo draft prospectus says that independent petroleum and petrochemicals consulting firm Turner, Mason & Company appraises the market value of the three refineries at $6 billion as of December 2009, excluding working capital assets.

The senior managers of the debt issue include Royal Bank of Scotland Group, UBS Investment Bank, BNP Paribas, and Credit Agricole CIB. The co-managers listed in the prospectus include Norway’s DnB NOR Markets, France’s Natixis Bleichroeder and UniCredit Capital Markets, a subsidiary of Germany’s second largest private bank, Bayerische Hypo-und Vereinsbank.

One theory about why Citgo is issuing new debt barely a month after Energy Minister Rafael Ramirez said that Pdvsa did not plan to increase its borrowings in 2010, is that Pdvsa is deliberately increasing Citgo’s debt and securing that new debt with assets in such a way as to make it less attractive for seizure if Venezuela loses any of the 10 arbitration proceedings currently under way at the World Bank:

“It’s a standard anti-takeover scheme – spend the cash, borrow money, let maintenance slide a bit. Suddenly nobody wants to buy the company.”

Ramirez and his mother-in-law, former Supreme Court Chief Justice Hildegard Rondón de Sansó, are a devious pair, so the notion that Pdvsa is trying to expand Citgo’s debt to reduce its appeal so that no one would want any part of the US refining company is interesting.

But Citgo says in its prospectus that it plans to use the new debt to pay off existing, leaving the company with $2.5 billion of outstanding debt, of which $1.5 billion would be secured by three refineries valued independently at $6 billion.

Another plausible explanation is that Pdvsa is borrowing $1.5 billion through Citgo because it is quickly becoming more expensive for Pdvsa to borrow directly.

Ramirez is always bragging about Pdvsa’s alleged financial strengths. But Pdvsa is heavily indebted and the real value of its assets is considerably less than the Chavez regime claims.

Pdvsa’s direct financial debt totals over $16 billion.

Pdvsa also is paying down $28 billion owed to China at a rate of about 160,000 b/d. This includes the recent $20 billion Chinese government loan to the Chavez regime (payable over 10 years at a rate of 100,000 b/d), and $8 billion (payable over three years, renewable) owed for China’s “contribution” to the now-depleted $12 billion Venezuela-China infrastructure fund created in 2008.

But Pdvsa also owes ExxonMobil and ConocoPhillips anywhere from $5.25 billion to $20 billion in compensation these oil majors are seeking for their Orinoco and other assets in Venezuela that Chavez stole in 2007. The $20 billion figure is a rough estimate of what Exxon and Conoco could be seeking at the higher end, including future lost earnings during the full life of the contracts that Chavez annulled arbitrarily.

Also, the recent joint venture agreements that Pdvsa signed with consortia led by Repsol and Chevron to develop the Carabobo 1 and Carabobo 3 projects represent up to $40 billion of investment, of which Pdvsa is responsible for 60%.

Pdvsa has structured its Orinoco joint venture plans so that the minority foreign partners must pay front-end bonuses of $500 million to $1 billion per project for rights to participate in these projects.

Pdvsa also is demanding that its foreign partners secure project financing for Pdvsa. In Carabobo 1 and Carabobo 3 the total financing which Ramirez claims has been obtained this way is over $2 billion.

And then there are Pdvsa’s joint venture deals with its Russian, Chinese, Italian, Cuban and Vietnamese “strategic” partners. These are worth on paper close to $80 billion, if Ramirez’s math can be trusted.

In March, Ramirez was saying that Pdvsa’s Orinoco expansion plans would require total investments of up to $120 billion, of which Pdvsa is responsible for 60% or $72 billion.

However, this $72 billion estimate does not appear to include a further $26 billion, roughly, that Pdvsa is supposed to invest in basic infrastructure in the Orinoco oil belt region – access roads, potable and waste water systems, electricity, telecommunications, etc.

It also does not appear to include two Orinoco projects (Carabobo 2 and Junin 10) that Pdvsa has been instructed to develop by itself after no bids were received on Carabobo 2 and talks on Junin 10 with potential partners Total and Statoilhydro broke down. These two projects represent a further $30 billion to $40 billion of investment over the coming 5-10 years.

But there also are Pdvsa’s two major offshore gas development initiatives in eastern Venezuela (Mariscal Sucre) and in the Gulf of Venezuela (Rafael Urdaneta).

The Mariscal Sucre initiative including up to three planned LNG trains is worth between $10 billion and $15 billion on paper, but Pdvsa has no partners yet. As for Rafael Urdaneta’s estimated development costs, let’s say $10 billion for discussion’s sake.

Pdvsa’s share of planned investments and its total debts are immense today compared with just five years ago. However, Pdvsa to date has not completed even one of its major projects. Not a single barrel of crude or cubic foot of gas is being produced yet, and no new production is scheduled to come on stream until end-2012 at the earliest.

But Caracas Gringo suspects that Pdvsa will miss by a country mile its end-2012 deadline for bringing new gas and crude production capacity on stream.

About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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