Caracas, Venezuela —
Venezuela’s state-owned PDVSA’s dependence on its US unit Citgo for refined products and diluent could be put in jeopardy by a US court order Thursday that may result in the company losing control over its most valued assets.

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US District Court judge Leonard P. Stark issued an order Thursday granting Canadian miner Crystallex’s request to include shares of the PDVSA holding company that owns US refinery Citgo as part of Crystallex’s efforts to collect $1.2 billion it is owed by Venezuela.

Crystallex was awarded the $1.2 billion in June 2017 over a dispute concerning Venezuela’s nationalization of Crystallex assets.

Thursday’s ruling in the Delaware court opens the door for Citgo’s other creditors to seek similar relief.

But because no attachment order was issued on how to secure collection of the judgment, exact ramifications on what will happen to PDVSA’s crown jewel Citgo is uncertain.

A public version of the order is not expected to be released until later this month.

Thursday’s order requires Crystallex and PDVSA to confer “no later than August 16″ and submit a joint status report “as to how this case should now proceed.”

Citgo is not releasing a comment on the ruling at this time, a company representative said via email on Friday.

But some analysts think the dispute could lead to PDVSA’s loss of control over its Citgo refineries,

“I think this is just the beginning of a massive legal dispute in which the likely result is that PDVSA and Venezuela will ultimately lose control over its most valued and strategic external asset,” said Francisco Monaldi, a Latin American energy policy fellow and lecturer at Rice University’s Baker Institute for Public Policy.

“There are many others with potential claims over Citgo assets and revenues including Citgo bond holders and bank creditors, PDVSA 2020 bond holders, Rosneft, Conoco, and a long list of other PDVSA and Venezuela creditors and ICSID claimants. Some of these have direct claims on Citgo or PDVSA and should be ahead in the line to Crystallex which has a claim on Venezuela”, Monaldi said.

Citgo’s three US refineries are “excellent plants,” according to John Auers, executive vice president at Turner, Mason & Company, making them attractive assets for creditors looking to collect debts from Venezuela.

Auers puts them in the “top 50% at least, and probably much higher” of all US refining assets.

“Lake Charles is world scale,” he said, referring to Citgo’s 418,000 b/d Louisiana refinery.

He notes that Citgo’s 157,000 b/d Corpus Christi, Texas, plant can run 100% heavy crude.

Citgo’s 179,265 b/d Lemont, Illinois, plant serving the Chicago market can also run some price-advantaged Canadian crude, he added.

While there is little doubt Citgo’s refineries will continue to operate under any ownership scenario, the amount of refined product flows from Citgo to Venezuela are up in the air depending on who has control. There is no guarantee that whoever ends up controlling the Citgo plants would supply Venezuela with refined products at current terms.

While more than half of PDVSA’s planned 6.67 million barrel refined product imports for August will be supplied by India, the country still relies heavily on Citgo, according to preliminary report seen by S&P Global Friday.

India’s Reliance Industries will supply 3.66 million barrels of refined products, receiving payment with shipments of DCO. Citgo is expected to supply 2.71 million barrels, with the remainder 300,000 barrels of 0.5% sulfur diesel to be supplied by Novum, according to the report.

In July, of the 25 shipments of oil products arriving at Venezuelan ports, 15 were from Reliance, nine by Citgo and one from MS International.

In June, PDVSA also received 25 shipments of imported oil products, with Reliance shipping ten cargoes, Citgo eight, Rosneft two, Novum two, Trafigura two and MS Internatinal one.

FAILING VENEZUELAN REFINERIES

Demand for imports will only rise as Venezuela’s 1.6 million b/d of refining capacity is unable to meet demand. Currently, PDVSA’s refining utilization is limping along at 21% of capacity due to a lack of crude and equipment inoperable due to lack of maintenance.

Control over Citgo and its three US refineries will ultimately determine how much gasoline and diesel flows from the US to Venezuela, as well as how much of Citgo’s cash flows back into the cash-strapped Venezuela economy.

Independent Venezuelan energy analyst Einstein Millan said the court case may eventually reach a dead end, but warned that an outcome not in Citgo’s favor could threaten PDVSA’s access to “fresh cash from Venezuelan heavy and extra heavy crude oil deliveries to the US, as well as the required dilluents for the Orinoco crude oils.”

Citgo’s refineries are an important destination for PDVSA crude exports. In May, the US imported 15.179 million barrels of Venezuelan crude, of which Citgo imported 6.39 million barrels, the most recent US Energy Information Administration data shows.

“But perhaps the most serious threat is the potential for weakening its presence in the market precisely when [US] shale oil producers are loosing momentum, Iran tensions are rising and global demand increasing,” Millan said. “Certainly that space left by PDVSA will be taken by most prominent Middle East oil producers.”

“In the long run Venezuela loses an strategic asset to compete with Canadian extra heavy,” said Monaldi.

Venezuelan crude production at 1.24 million b/d in July has fallen from 2.35 million b/d in January 2016, according to S&P Global Platts estimates.

–Mery Mogollon, with Janet McGurty in New York and Meghan Gordon in Washington, newsdesk@spglobal.com

–Edited by Gary Gentile, newsdesk@spglobal.com

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