Summary: Venezuela recently gave Russia’s oil company a lien on its U.S. assets — one of the ten largest refinery companies in the country — in exchange for what seems at first glance a remarkably small loan. Upon its inevitable default, Russia will have control over strategic energy assets in the U.S. This geopolitical gambit will have signifiant repercussions for all Latin America.
About the Author: Carlos St. James is a leading advisor to energy investors and developers in emerging markets since 2005 through Santiago & Sinclair, LLC. He co-founded and presided over the Argentine Renewable Energies Chamber from 2005-2011; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; and publishes the Latin American Energy Review in his free time to help generate debate on the industry’s issues.
Latin America has always viewed foreigners with suspicion. From conquistadores looking to plunder gold and silver for the Spanish crown, through Washington Consensus pressure to privatize national utilities, outsiders have always been ready to grab some of the continent’s rich natural resources.
Now Venezuela, by many measures the most resource-rich country in the entire region, is increasingly being looked at with concern by its neighbors. The crown jewels are of course its oil reserves — the largest in the world — and its energy infrastructure. But the Bolivarian Revolution has been an epic failure. Worse, in its rejection of U.S. influence it gave too much influence to China while becoming a pawn of Russia; both countries are now beginning to expand their spheres of influence across the region. The Chinese have made enormous loans to the country that must be repaid in oil.
But Russia has been far more deceptive: after the recent U.S. elections Rosneft, Russia’s government-controlled oil company, lent Venezuela money and got a lien on its significant U.S. oil assets as collateral. When the inevitable default takes place, Russia will at worse have an impressive windfall profit — and at best own key strategic energy assets in the United States. How did this come to pass? Has Russia really hoodwinked both Venezuela and the Unites States in this bait-and-switch?
In 1986 Venezuela’s national oil company, Petroleos de Venezuela S.A. (PDVSA), acquired 50% of U.S. oil company Citgo, buying the remaining half in 1990.
Citgo is one of the ten largest refinery companies in the United States (click on maps and graphs to enlarge). It owns three refineries plus half of a fourth in partnership with Exxon Mobil; has multiple pipelines crossing the south; and a vast network of terminals across the entire eastern half of the country. Its Lake Charles, Louisiana, refinery is the sixth largest in the country.
After Hugo Chavez’s death in 2013, as la revolucion bolivariana’s cash was running out, PDVSA hired an investment bank to quietly explore a possible sale of Citgo. It received a number of offers ranging from $7 to $10 billion – at a time when oil prices were at about the same level as today but still dropping. In the end the government decided against a sale after raising money from the sale four of PDVSA’s German oil refineries to Rosneft. The ties between the two oil giants continue to grow: last year Rosneft also promised to invest $14 billion in the Venezuelan oil sector over the next decades, thus improving the odds of Maduro’s political longevity — albeit as Russian puppet.
Preparing a sting
At the same time PDVSA also dramatically increased the amount of money it spent lobbying in Washington, an unusual move for a cash-strapped government.
In the sixteen years between 1998 and 2013, PDVSA spent an average $350,000 a year on lobbying efforts in Washington (see chart); nothing noteworthy there. But in the last three years the annual average has suddenly increased sevenfold to $2.2 million.
The $6.6 million paid in lobbying in the last three years went overwhelmingly to one Washington lobbying firm: Brownstein Hyatt Farber Schreck, which received $2 million of that total. In each of those years PDVSA was among its top three highest-paying clients. And in a coincidence perfectly timed for conspiracy theorists, a key Brownstein Hyatt executive left the firm this January to join the Trump administration, hired for one specific task: selection of the next Supreme Court nominee. Presumably one with a clear pro-business profile, unlikely to be ruffled by the possibility of Russians owning key energy infrastructure in the United States.
Meanwhile Rex Tillerson, Chairman & CEO of Exxon Mobil until taking on the role of Secretary of State in the Trump administration was also the director (1998-2001) of the U.S.-Russian oil company Exxon Neftegas, where he developed close ties to Putin; in 2014 he famously opposed sanctions against Russia for its military intervention in Ukraine – sanctions that were approved by the U.S., the European Union, and a number of international organizations. Tillerson’s new government role was an unexpected stroke of luck for Russia.
Rosneft is not a nice oil company
Rosneft was founded in 1992 and grew through “acquisitions”: for example, it took over competitor Yukos Oil in 2004 after Putin jailed its founder, Mikhail Khodorkovsky; it took over Bashneft Oil in 2014 after jailing its owner, Vladimir Yevtushenkov. The Russian government owns 50% of Rosneft. To paraphrase Russ Dallen of the Latin American Herald Tribune, Putin is using Rosneft to further his geopolitical ambitions.
Venezuela, increasingly desperate for liquidity
In October of last year PDVSA managed to extend the maturity of some bonds while adding more debt. It persuaded bondholders to increase total obligations by 20% to $3.4 billion and extend their maturity to 2020. But what clinched the deal was offering 50.1% of Citgo shares as collateral.
Then just after the U.S. elections, PDVSA borrowed a paltry $1.5 billion from Rosneft and gave them the remaining 49.9% of Citgo’s shares as collateral: the company that just a couple years earlier had been valued at around $10 billion was now offered up at a combined $4.9 billion ($3.4 + $1.5 bn). Rosneft can acquire enough of the bonds to have control of the decision-making once default happens – just a matter of time, and quite possibly with Maduro’s blessing.
(This might be avoided if an enterprising U.S. oil company or investor acquires the PDVSA bonds. In any event there is a lot of money to be made by arbitraging the whole thing, assuming Citgo is still worth close to $10 billion. To whoever does it: remember me when Christmas comes around. You’re welcome.)
In 2005 CNOOC, a Chinese government-controlled oil company, bid $18.5 billion to acquire Unocal, a U.S. oil company. It was front page business news for a long time until it became clear that in a post-9/11 world the U.S. government would not allow a foreign government – and one that didn’t qualify as a clear ally – to control such key strategic energy assets: the Chinese could not be trusted. Unocal’s shareholders did not maximize their potential returns: Chevron ended up buying it for $16 billion.
Hugo Chavez’s handpicked successor, Nicolas Maduro, has nowhere near the political savvy or intelligence of his predecessor; Putin is running circles around him. In a story repeated too many times in Latin American history (but usually with the U.S. as mastermind), Maduro has become a pawn of foreign interests in exchange for remaining in power. Meanwhile, the U.S. will need to get its own house in order quickly or continue to lose leverage in the region – perhaps permanently. But for Latin Americans, “America First” is a policy they’ve already known for decades.
© Latin American Energy Review 2017
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