ConocoPhillips, PdVSA agreement to open creditor floodgates in Venezuela

Author: John Crabb | Published: 29 Aug 2018
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ConocoPhillips has signed an agreement with Venezuelan state-owned oil and gas company Petróleos de Venezuela (PdVSA) to recover $2 billion due for failing to uphold its contractual commitments in 2007. Canadian company Crystallex and other creditors of PdVSA are likely to follow suit.

Lee Buchheit, partner at Cleary Gottlieb, suggested: “It will send a signal to other creditors that Venezuela is vulnerable to the enforcement of court judgments. That perception may prompt other claimants to pursue their own legal remedies.”


"It will send a signal to other creditors that Venezuela is vulnerable to the enforcement of court judgments"


The move comes after an April 25 International Chamber of Commerce (ICC) arbitration tribunal awarded American multinational energy corporation ConocoPhillips the sum, because PdVSA had unlawfully taken a number of refineries in the Caribbean Sea.

Following the arbitration, ConocoPhillips itself seized a number of PdVSA’s assets, including cargo ships and terminals. It is expected that in the wake of this announcement others who find themselves in similar situations will take steps to enforce similar retribution.

KEY TAKEAWAYS
  • ConocoPhillips has signed an agreement with Venezuelan state-owned oil and gas company PdVSA to recover $2 billion due for failing to uphold its contractual commitments in 2007; 
  • This will send a signal to other creditors that Venezuela is vulnerable to the enforcement of court judgments; 
  • Those most likely to be spurred on by this announcement are stakeholders of PdVSA owned US subsidiary Citgo, which is the country’s most obvious seizable asset; 
  • By coming up with $2 billion it means that the existing creditors of the outstanding bonds are going to get $2 billion less. 

“ConocoPhillips had access to the refineries in the Caribbean and they were always going to be able to seize them,” said Mike Fitzgerald, partner at Paul Hastings. “Venezuela waited until the last possible minute, as they always do, but it is an interesting segue to what might happen with Citgo, which is a huge investment for them.”

Those most likely to be spurred on by this announcement are stakeholders of PdVSA owned US subsidiary Citgo, an oil refinery and transportation company, which is the country’s most obvious seizable asset. Any creditor with an arbitration judgement against Venezuela - and there are several out there that are trying to realise on these judgements - will jump on the bandwagon and try to enforce the stipulations against Citgo. 

venezuela problems
Hyperinflation has sparked widespread riots as Venezuela's people go hungry

"PdVSA is operating Citgo and the sovereign is operating PdVSA. The concept of 'piercing the corporate veil' is rare, but in this case the court found that Citgo was in effect a puppet of the Venezuelan government. It is likely that the creditors of Venezuela and PdVSA will seize Citgo in its entirety, and the secured and unsecured creditors of Citgo will be fighting over the scraps," said Fitzgerald. 

Gold miner Crystallex ,which settled its own $1.2 billion dispute with the Venezuelan state after it nationalised the Las Cristinas gold mine, bankrupting the company, was told it could seize $1 billion of Citgo shares as compensation. 

Do you want the good news…?

The news came during a particularly bad week in Venezuela, even by its current absurdly low standards. On the same day that the country was hit by two earthquakes, Maduro’s government issued a new sovereign bolivar. The move is an effort to curb the near 3,000% hyperinflation of the last month that has rocked the country and made simple food products near unaffordable for its population. This has not been helped by blanket sanctions placed on the country by the US.

Whether this latest development is positive or negative for Venezuela is up for debate. Manuel Orozco, sovereign ratings' analyst at Standard & Poor's, suggested that it is positive news as it means that oil and gas operations will be able to resume in the Caribbean, where a significant share of its oil is located, but it will not solve all of the country’s numerous problems.

“This will help Venezuela’s foreign policy and cash flow generation,” he said. “Venezuela gets endless bad news from PdVSA and they represent almost half of the country’s revenue, and with this low production and the fiscal deficit at 25%, they surely won’t be able to take over the financial needs that government has.”

Fitzgerald, however, said that this announcement is the latest chapter in the continuous decline of the country's economy.


"PdVSA coming up with a $2 billion settlement payment to ConcoPhillips leaves aside the needs of the people of Venezuela"


"PdVSA coming up with a $2 billion settlement payment to ConcoPhillips means the other creditors of Venezuela and PdVSA will get $2 billion less, leaving aside the needs of the people of Venezuela. ConocoPhillips clearly extorted, albeit legally, that payment from them," he said. 

“PdVSA and Citgo bonds have been trading down for a long time. These latest developments will cause more downward pressure. "This is just another step in the continuing decline of the economy. If Citgo goes, things will get interesting, it is the crown jewel," he said. 

“Eventually they are going to have to try to adopt an Argentina type model where creditors can’t seize anything outside of the country itself, but when your economy is dependent on oil like there's is, it is going to be difficult for them,” he added.

See also

Ofac: Venezuela's crypto offering could be sanctions breach

Targeted sanctions help US maintain financial influence abroad

 


 

 

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