ANALYSIS: New crude game erodes luster of most Citgo refineries

HOUSTON, Sept 22 (Reuters) - The fast-changing nature of crude oil flows in the Americas means only one of three Citgo refineries in the United States will generate keen interest among buyers as Venezuela's cash-strapped state-run PDVSA looks to ...

HOUSTON, Sept 22 (Reuters) - The fast-changing nature of crude oil flows in the Americas means only one of three Citgo refineries in the United States will generate keen interest among buyers as Venezuela's cash-strapped state-run PDVSA looks to sell its U.S. unit, and it may fetch less money than hoped, experts say.

Citgo's plant near Chicago is a highly profitable cash cow because it runs cheap heavy crude from the burgeoning fields of Canada; Citgo's two plants on the U.S. Gulf Coast, however, are locked into long-term supply contracts that force them to run expensive Venezuelan crudes, officials have said.

"Lemont is kind of the gem in the portfolio," said a refining consultant who asked not to be identified. According to his valuation, Lemont could be sold at a price four times higher than Citgo's other facilities.

People familiar with the sales process have said PDVSA is trying to obtain $8 billion to $10 billion for Citgo, the core of which is a refinery network with 749,000 barrels per day (bpd) of capacity, along with pipelines and terminals.

But that price tag looks optimistic and the sale of Citgo is full of risks for PDVSA, which was once the top supplier of foreign oil to the United States but has slipped to No. 4 as surging North American output cuts demand for imports.


PDVSA could get as little as $7 billion, or 30 percent less than the top end of PDVSA's desired valuation, according to three analysts and consultants at firms, including Barclays. In addition, Bank of America Merrill Lynch warned that after paying creditors, PDVSA may only net $1.8 billion.

Risks for PDVSA include further displacement of Venezuelan crude from the U.S. market, giving up a reliable source of cash and dividends, and the chance it might have to use sales proceeds to compensate firms whose assets were nationalized in 2006-7 and are now asking in arbitration.

The Citgo sale is part of a broader move by PDVSA to shed its stakes in the 350,000 bpd Hovensa refinery in the U.S. Virgin Islands, the 192,500 bpd Chalmette refinery in Louisiana, and specialized refineries in Sweden, England and Scotland.

Most investors and analysts agree that trying to sell the three Citgo refineries together will be long and difficult, unless the company finds a private equity firm willing to purchase them all and then offer assets separately to other refiners.

Investment bank Lazard Ltd, which is running the sale process for Citgo on behalf of PDVSA, has told potential buyers that individual bids will be accepted.

"Selling everything to a private equity firm would imply a big discount. Only a hurried seller would do that. But Venezuela is desperate: it needs to pay financial debt and it will have to compensate foreign oil companies," said Francisco Monaldi, a visiting professor of energy policy at Harvard University.

Arbitration cases at the World Bank involving Exxon Mobil Corp and ConocoPhillips will likely conclude next year. The U.S. companies are asking for billions of dollars in compensation because their assets in Venezuela were nationalized in 2006 and 2007.

Citgo paid $9.3 billion in dividends during the 1999-2013 administration of deceased President Hugo Chavez, its financial reports say, 11 percent of PDVSA's net profit in that period.


Though Lemont has only 22 percent of Citgo's capacity, it contributed to more than a third of Citgo's profits through 2011, according to the company's financial reports.

Though many firms have been mentioned as potential buyers of the 167,000 bpd Lemont refinery in Illinois, Canadian companies could be the most interested, analysts say, since it would give them a guaranteed source of demand for their oil.

It is less clear who might want the Gulf Coast plants, the 165,000 bpd Corpus Christi, Texas refinery and the 425,000 Lake Charles, Louisiana refinery. But companies such as PBF Energy and Marathon Petroleum have said publicly they would take a look at the assets.

Even though Corpus Christi is located in the heart of the booming Eagle Ford shale producing region, it is configured to mainly run heavy Venezuelan oil and would need big investments to run lighter crudes.

The 425,000 bpd Lake Charles refinery, Citgo's newest, is also attached to Venezuela, but it has more flexibility to run other crudes because of its size, facilities and location.

Lake Charles has two fully-owned pipelines that allow it to benefit from cheap local crudes and also to transport imported oil from Latin America, West Africa and other regions. That makes it easier to sell than Corpus Christi, traders said.

When PDVSA previously sold Citgo assets in 2006 and 2007 it insisted on selling them with supply contracts. But buyers, NuStar Energy and Lyondell Basell's Houston Refining , later got rid of those pacts, finding them cumbersome.

Sales this time will also come with pacts, former Petroleum Minister Rafael Ramirez said in August before being replaced.


"Nobody wants to buy Venezuelan crudes through a supply contract. It's cheaper to buy cargoes on the open market and refineries are able to mix them with other widely available Latin American grades," a trader said.

PDVSA's shipments to Citgo have been increasingly unstable as it sends more crude to China to pay debts, but selling to a third party would put pressure on it to uphold supply quotas.

Venezuelan shipments to Citgo fell 14.8 percent in the first half of 2014 to 161,000 bpd, according to the U.S. Energy Information Administration, compared with a quota of 300,000 bpd.

As a consequence, Lake Charles and Corpus Christi have been getting about half of their crude recently from cheaper local providers. That has, paradoxically, lifted their profits for the time being, making them appear more valuable.

Citgo's net income rose 46 percent from 2011 to $778 million in 2013, according to data quoted by Merrill Lynch.

"Citgo's margins have improved as they are running less overpriced Venezuelan crude," said a source at a major U.S. refiner.


By Marianna Parraga and Erwin Seba

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