US argues against Citgo sale: Update

Adds detail from hearing.

Advancing the sale of Venezuela's US refining subsidiary Citgo could damage US foreign policy goals and that country's struggling opposition beyond repair, President Donald Trump's administration wrote in an 11th-hour filing ahead of today's oral arguments on the refiner's future.

Letters from the US Treasury's Office of Foreign Assets Control (OFAC) and US Special Representative for Venezuela Elliott Abrams argued that establishing a process to satisfy an international arbitration award with shares of the roughly 770,000 b/d refining business would only complicate US strategy there.

Moving forward with efforts by defunct Canadian mining firm and arbitration winner Crystallex would instead damage Venezuelan support for the US-recognized opposition working to remove President Nicolas Maduro from power, Abrams wrote.

"Every Venezuelan knows of this company and it is viewed, as are Venezuela's oil reserves, as a central piece of the national patrimony," Abrams wrote. "The impact on [US-recognized interim president Juan] Guaido, the interim government and US foreign policy goals in Venezuela would be greatly damaging and perhaps beyond recuperation."

Abrams supported Guaido's arguments that his US-recognized leadership should dissolve a 2018 ruling exposing Citgo to the billions of dollars sought by Venezuela's creditors. And OFAC denied Crystallex arguments that determining how to proceed with a sale would help the office decide whether to grant the company a license to execute it.

Opposition leaders have long hoped for executive branch assistance in the US District of Delaware case that has come perilously close to ending Venezuelan control of one of its most valuable overseas assets. Yesterday's late filing arrived more than seven months after an initial invitation from the court to respond, two months after another solicitation of executive interest and less than 15 hours before today's teleconference on whether to develop sale proceedings on shares of Citgo to help satisfy a $1.4bn arbitration award.

"The US sincerely apologizes to the court and the parties for any inconvenience caused by filing so close to the hearing date," the Justice Department said.

US attorneys participated in the hearing but did not expand on letters filed last night.

US support of Guaido is not news to the court, which accepted the opposition leader's representatives on behalf of Venezuela soon after the executive branch recognized him as interim president in January 2019. Guaido's appointed ad hoc boards represent Citgo and Venezuelan national oil firm PdV in US courts.

His representatives argued unsuccessfully against a sale in appeals last summer before the US 3rd Circuit Court of Appeals, and failed to attract consideration from the US Supreme Court this year.

But the opposition government can still persuade the US District Court of Delaware that circumstances have changed enough to remove a ruling argued in 2018 by Maduro representatives.

The court at that time determined that Maduro's government had so closely controlled Citgo that it functioned as an alter ego of the state. The decision pierced the corporate legal structure that normally protects such companies in the US from that exposure. Crystallex, now controlled by New York hedge fund Tenor Management, could seek shares of Citgo's holding company to satisfy an international award for mining interests expropriated under former president Hugo Chavez in 2011.

Has Venezuela changed?

The case proceeded on two tracks this summer.

The first considers whether circumstances have changed enough, as Guaido argues, to throw out the 2018 ruling. Though Venezuela has lost appeals of that decision, the judge could determine that enough has changed in Citgo's circumstances, as argued by Abrams, to render the original, proper decision now moot. US judge Leonard Stark asked why the case should go forward given the consequences that the government warned.

"It is not a malefactor cleaning up its act — it is a new sheriff in town," Venezuelan counsel Donald Virrelli said. "It is a new sovereign government asserting authority at considerable risk to its leaders in order to rescue the country from disaster and restore the rule of law."

Crystallex has pointed to the Guaido government's lack of control over any Venezuelan institutions outside the US. The opposition has no access to Citgo's revenue and cannot ship its gasoline to Venezuela because of US sanctions. The court must follow Trump's recognition of the Guaido government as the accepted representatives of Venezuela. But the court did not need to also ignore the reality of the opposition control, or further delay Crystallex's certified award to hope for conditions to change, Crystallex attorney Miguel Estrada said.

"Mr. Abrams may care intensely for the new, fledgling regime in Venezuela," Estrada said. "That is not a legal argument."

US judge Leonard Stark questioned arguments by Citgo and Venezuelan national oil company PdV that the companies were not in possession of the shares Crystallex sought and that arguments should shift to state law considerations. The attorney agreed with Stark that the parties had previously made the court aware that the "illegal Maduro regime" could have the shares in their possession, because they had not received any clear answers until Guaido appointed a new board.

"Why should Crystallex and the court have any confidence, based on the arguments you are making, that these shares are not really attached and are going to be transacted?" Stark asked.

How to sell

The second track would determine the appropriate way to sell shares of Citgo to satisfy the roughly $1bn remaining to be paid on the award. The court will address this at a future hearing after major disruptions from uncontrolled hold music halted the nearly three-hour proceeding twice.

Crystallex has sought a straightforward auction under Delaware law. Venezuela, Citgo and other creditors, including ConocoPhillips, have said such a proceeding could undervalue the refiner — leaving nothing left after satisfying the Crystallex debt. ConocoPhillips proposed a receivership, similar to US bankruptcy. Venezuela argues that if a sale must proceed, it should be carried out by PdV to ensure the highest possible value.

"Crystallex has no incentive to minimize the number of shares sold or respect the due process rights of others, including PdV," the national oil company said.

Such a sale would leave the legitimacy of the opposition government "severely eroded" if it took place with Maduro still in power, Abrams warned.

"Should these assets be advertised for public auction at this time, the Venezuelan people would seriously question the interim government ability to protect the nation's assets, thereby weakening it and US policy in Venezuela today," Abrams said.

Maduro has meanwhile moved to clip Guaido's remaining influence in Venezuela. Guaido's claim as interim president, recognized by dozens of western governments, relies on his leadership of the National Assembly. Venezuela's supreme court ratified a rival leadership in May, and a new Maduro-aligned electoral board was appointed last month. Opposition leaders have not decided whether to recognize or participate in elections under those circumstances later this year.

By Elliott Blackburn