Citgo assets may be at risk in arbitration

AP via Houston Chronicle ^ | June 30, 2007 | KRISTEN HAYS and JOHN OTIS

[thackney]

ConocoPhillips and Exxon Mobil Corp. could hold a powerful card to make Venezuelan President Hugo Chavez bet his country's sizable American assets in the high-stakes nationalization of the Venezuelan oil industry, experts say.

The Citgo subsidiary of Venezuela's national oil company has five refineries in the U.S. experts say could be targeted for seizure if a stalemate prompts one or both U.S. oil majors to seek recompense through international arbitration.

Neither Citgo nor its Venezuelan counterpart Petróleos de Venezuela, known as PDVSA, returned repeated messages seeking comment.

Houston-based ConocoPhillips and Irving-based Exxon Mobil walked away from the table last week instead of accepting minority interest in Orinoco River basin projects. Exxon Mobil is holding its cards close, but ConocoPhillips said last week that it is keeping open all legal options, including international arbitration.

"The government of Venezuela owns significant assets in the United States through Citgo, as well as significant resources that move through the U.S. financial system," said Jose Valera, a partner with King & Spalding in Houston. "These are assets that could conceivably be subject to an arbitration award."

International arbitration is expensive and can take two years, said Michael Goldberg, a partner and arbitration expert at Baker Botts in Houston.

"In every situation where you have an expropriation, the host country and the company have to decide where the line is for fair compensation," Goldberg said.

"If the host country squeezes too hard, then they face a very substantial likelihood of an arbitration awarding full compensation. If the host country comes close to a fair resolution, then most companies would like to avoid going through the process of arbitration."

Last week, ConocoPhillips and Exxon Mobil refused to accept new working terms of their Venezuelan operations imposed by PDVSA. The company absorbed their stakes in the Orinoco River basin projects, and ConocoPhillips and Exxon Mobil are in talks regarding compensation for what they are giving up.

Four other oil companies — Chevron Corp., Total, BP and Statoil, Norway's state-owned oil company — signed accords allowing them to stay on as PDVSA's minority partners.

PDVSA took majority interest in four projects, valued at about $30 billion, which had been operated by Exxon Mobil, ConocoPhillips, Chevron and Total. BP and Statoil were already minority partners.

Keeping options open A lawyer familiar with the negotiations told the Chronicle that the companies — ConocoPhillips, Exxon Mobil, Chevron Corp., Britain's BP, France's Total and Norway's state-controlled Statoil — were offered essentially the same deal. PDVSA gave them veto power over investment decisions but said they would not have the right to seek international arbitration over future disputes, the lawyer said.

The companies declined to comment on terms.

ConocoPhillips said last week that while it hopes compensation talks succeed, it has preserved all legal rights, including international arbitration. In the meantime, the company said it expects to write off $4.5 billion, or its entire interest in three Orinoco projects, in its second-quarter results.

Exxon Mobil has said only that it is in compensation talks, declining to say whether arbitration may be an option.

Earlier this year, Chavez decreed that PDVSA would take majority control of foreign-run oil projects. PDVSA took over operations May 1, and last Tuesday was the deadline for the foreign companies to agree to terms for reduced roles.

Venezuela is the world's eighth-largest oil exporter, and the U.S. is its No. 1 market for crude.

Enrique Sira, an analyst with Cambridge Energy Research Associates, said it is still possible that Exxon Mobil and ConocoPhillips can reach a deal with PDVSA to continue their Venezuela operations. The signed agreements won't go before Venezuela's National Assembly for final approval until August.

The rules But the U.S. companies' focus is turning toward compensation, Sira said. They want it based on the market value of their operations, while the Venezuelan government has said it would pay what the companies put into the assets rather than what they would sell for.

If talks don't produce an agreement that closes the gap, arbitration could be an option, said Dino Barajas, a partner at Paul Hastings in Washington, D.C.

The companies' production-sharing agreements likely address arbitration, specifying when the firms are entitled to arbitration and in what venue, such as the World Bank's International Centre for the Settlement of Investment Disputes in Washington or the International Chamber of Commerce in Paris, Barajas said.

Typically, the host country and company involved each choose an arbiter and then agree on a third for a three-member arbitration panel to hear the dispute. Once the panel hears all the arguments, it can award compensation to the complaining company.

Barajas said both sides are required to honor such awards under international agreements.

Possible ramifications The New York Convention was designed to make arbitration awards enforceable worldwide.The International Centre for the Settlement of Investment Disputes keeps a list of countries that have agreed to honor arbitration awards. Venezuela and the United States participate in both.

If Venezuela refused to honor such an award, a U.S. judge could issue an enforcement order to seize PDVSA U.S. assets, which could include refineries, cash in bank accounts or accounts receivable.

"The moment you hear someone sniffing around, looking into your bank accounts, you can pull that out," Barajas said. "With a hard asset, that's just game, set, match. You know where it is. It's not going anywhere."

Of Citgo's refineries, three process fuels while two process asphalt. Earlier this year NuStar Energy, a spinoff of Valero Energy Corp., put in a bid to buy the asphalt plants, but no sale has been announced.

However, companies must consider that a country may not allow them to return once they've launched an arbitration, said Ray Whitman, a partner with Baker Hostetler in Houston.

"They are long, drawn-out fights," he said, "and then you have to worry about whether you ever have to do business in that country again."

[Paleo Conservative]

Right, you don’t need much pepper on ice cream.

Well here's a link to a recipe for "Sour Cherry and Black Pepper Ice Cream". It calls for two tablespoons of cracked black pepper.

http://www.foodnetwork.com/food/recipes/recipe/0,1977,FOOD_9936_2449,00.html

[SAJ]

Y'know, financial ''journalists'' have been throwing around the notion of Yellow Peril refining, esp. for V's sludge, for about 25 years now, off and on.

Result to date? Last time I checked, Jan-Feb this year, Chinese PLUS Russian heavy/sour refining capacity was on the order of 175Kbbl/day. Sure, they'll build some (very expensive, highly specialised) plant. No doubt. However, you **know** what prayers the ChiComs have to be saying every night, dontcha?

''Please God, don't let anyone shoot Hugito''.

Why? Because he's very likely the only dumb sumbich in the entire oil industry -- anywhere -- who jabbers on about moving a hard-to-handle grade of crude 8000-10000 miles more than necessary, for political reasons.

The ChiComs aren't stupid; Hugito is. They know that the minute Hugito goes away, so does 95+% of their input for the shiny new heavy/sour refineries. Sure, they can still run other grades, assuming anyone trusts them sufficiently, but the minute Chavez is out of the picture, the ChiComs start losing their a$$ on the whole deal.

In short, and net-net, I'm just quaking in my boots that Hugito might cut a deal with the ChiCons. Sure I am.

[SAJ]

Say, do either of you chaps have to hand an article or link that describes what LCC and VLCC transport of heavy sour crude does to hulls and discharge equipment? I think our good friends on this thread would benefit from a detailed account, esp. any info on the effect of extended exposure.

Thanks in advance if you've got one or another of these.

[thackney]

Turns out that US and Caribbean-based refineries constitute about 90% of all the refineries capable of processing Hugito's sludge.

Keep in mind, currently less than half of Venezuela's oil is sent to the US. He certainly does not have a market for 100% without us, but he does not 100% depend on us either.

[SAJ]

And just exactly which brain-dead oil company is going to bid for CITGO refineries in the US, knowing that in short order they might be going under the hammer via a court order or be awarded to Conoco or Exxon through arbitration?

Right. Not a one. As I've argued on this board for years, Hugito is the absolute number-one world-champeen worst oil operator on the planet. No one is remotely a close second.

Another masterstroke by Hugito. You recall that old song ''Winner Go Round In Circles''?

He got some plant ain't got no bid-ders for
Just watch he as-sets ta-ken a-way.

[thackney]

Ping for sour crude and related corrosion issues, if you have time.

Thanks

[Paleo Conservative]

Which they are in the process of selling...

The US goverment could block the sales too, especially considerting Hugo's threats to confiscate assets of US oil companies in Venezuela.

[SAJ]

True enough, Hack. But, I'll wager you'll agree, this scheme of trans-Pacific shipping to refine is purely insane on half a dozen different levels.

Given the well-known fact that his oil infrastructure has gone straightaway into the sewer since the PDVSA strike, and given that his spending has gone nowhere but straight up, I claim -- and with good reason, I believe -- that he needs every dime of revenue his little Marxist hands can find.

He can't tolerate (or, likely, survive) any further significant production/sales drop. And this little fact is going to change the game, bigtime, and right quick, says I.

[thackney]

Say, do either of you chaps have to hand an article or link that describes what LCC and VLCC transport of heavy sour crude does to hulls and discharge equipment?

Not that I quickly found but I asked someone how may know more. Keep in mind the transport, storage and processing of sour crude is not a new topic nor a concern limited to Venezuela. Lots of decades of experience available in lots of areas of the world. Sour Crude is not a show stopper by any means, just another expense that was a justifiable expense back when oil was a third the current price.

[thackney]

this scheme of trans-Pacific shipping to refine is purely insane on half a dozen different levels

But it has been economically done to our West coast for decades. Asia is a fast growing market, at $20/barrel it was justifiable to send it from Saudi Arabia to California. Even his low grade stuff at $50 is pretty easy to justify shipment to Asia.

[SAJ]

So, who has the fleet to transport mega amounts of heavy sour to China? AND, how much premium over standard rates will such a cargo command?

Oh, yes, one other thing. You know, certainly, that blockading Hugito's exports is utterly child's play. Doesn't even require a carrier group.

6 months of that, and he has a revolution on his hands. Even the mention of a blockade will send rates soaring, and his bloody sludge will be substantially less valuable than it is now. AND, fewer dollars into his pocket thereby.

[SAJ]

Perhaps. Certainly the demand is there.

The question is transport. VLCCs do not navigate the Panama Canal, do they? If so, I'm misinformed. If not, then where the bloody hell does Hugito intend to find a fleet, eh?

[thackney]

-—VLCCs do not navigate the Panama Canal——

No, hence the term PanaMax for shipping.

Aframax
(shipping) An ocean-going crude oil tanker vessel of standard size between 80,000 and 119,000 dwt that is the largest crude oil tanker size in the AFRA (Average Freight Rate Assessment) tanker rate system.

Capesize
(shipping) An ocean-going cargo vessel that is physically too large to fit through the locks of either the Panama or Suez Canals and therefore must voyage via Cape Horn at the southernmost tip of South America to get to or from the Atlantic and Pacific Oceans, or the Cape of Good Hope at the southernmost tip of South Africa to get to and from the Indian and Atlantic Oceans. Capesize vessels generally serve deepwater terminals handling raw materials, such as iron ore and coal.

Handymax
(shipping) A small bulk or oil tanker vessel of 30,001 to 50,000 dwt that is a larger version of the popular Handysize vessel.

Handysize
(shipping) A small bulk or oil tanker vessel that is suited to tie up at a T2 type pier. These vessels are a maximum of of 10,000 to 30,000 dwt. These vessels are more maneuverable and have shallower draft than larger vessels and therefore make up the majority of the world’s ocean-going cargo fleet.

Panamax
(shipping) An ocean-going cargo vessel of the maximum size possible to pass through the locks of the Panama Canal, which are 1000ft long by 110ft wide and 85ft deep. These vessels are typically of 50,000 to 80,000 dwt, 965ft (290m) in length; 106ft. (32.3m) beam; and 39.5ft (12.04m) draft.

Suezmax
(shipping) An ocean-going cargo vessel of the maximum size possible to pass through the locks of the Suez Canal in Egypt. This standard has evolved over time. Prior to 1967, a Suezmax was a maximum of 80,000 dwt. The canal was closed between 1967 and 1975 because of the Israel-Arab conflict. Upon reopening in 1975, after many modifications to the locks and canal itself, the maximum was increased to 150,000 dwt.

Ultra Large Crude Carrier (ULCC)
(shipping) An ocean-going crude oil tanker of 300,000 to 550,000 dwt. These are the largest vessels in the world and are used for carrying crude oil on long haul routes from the Arabian Gulf to Europe, America and the Far East, via the Cape of Good Hope. These vessels require custom built terminals for loading and discharge.

Very Large Crude Carrier (VLCC)
(shipping) An ocean-going crude oil tanker of 200,000 to 299,999 dwt. These vessels have greater flexibility than ULCCs due to their smaller size and are used extensively in the Mediterranean, West Africa and the North Sea. These vessels can sometimes be ballasted through the Suez Canal.

[SAJ]

Way cool! Never seen a summary of classes of carrier like that, all in one place.

< stolen and saved > Thanks, m'friend!!

[chaosagent]

“BTW, Citgo stations in this area are changing over to Circle Ks— keep in mind that it’s still Hugo’s operation.”

Not true. Check out Snopes below at the bottom of the page.

http://www.snopes.com/politics/gasoline/citgo.asp

Circle K is owned by a Canadian group.

[Paleo Conservative]

There’s an oil pipeline along the Panama Canal, but it flows the opposite direction that Hugo needs.

[thackney]

taken from here:

http://www.worldtraderef.com/wtr_nl/WTR_site/vessel_classification.asp

[SAJ]

Yep. He's made noises from time to time about reversing the flow. Pretty much guaranteed to cause some serious problems.

Don't worry. Genius Hugito will find a way to shoot himself in both feet...again.

[Carl LaFong]

Thanks-I just presumed since they all changed at the same time that they we’re still Citgo. It just shows that when you presume you make a ‘pre’ of ‘u’ and ‘me’

[Paleo Conservative]

Circle K is owned by a Canadian group.

Here in south Texas, the owner of about 300 Circle K's decided to stop sending franchise fees to Circle K and have his own brand of covenience stores called "Stripes". At the same time they repainted the exteriors of the stores and changed the signs, they switched all their Citgo stations over to Valero.

It's final: Circles are out, Stripes are in
Susser Holdings' pumps now bear Valero's name

Elvia Aguilar Caller-Times
Wednesday, February 14, 2007

.................

In July, Susser entered into a new 12-year fuel supply agreement with Valero Marketing and Supply Co. to supply all of its retail stores and certain wholesale locations that were supplied by Citgo. All of the retail stores that were supplied by Citgo now are supplied by Valero.

.................