After an investigation by Redd Intelligence and the Latin American Herald Tribune uncovered Venezuela's secret mortgage of Citgo to Russia's Rosneft, Crystallex has launched a suit against Rosneft and PDVSA's bondholders to get CITGO back.
CARACAS – Canadian Gold miner Crystallex – which is owed $1.4 billion by Venezuela for the 2011 unlawful expropriation of its Las Cristinas gold mine project – on Wednesday launched suits against both Russia's state controlled oil company Rosneft and PDVSA's bondholders for the "fraudulent receipt" of Venezuela's U.S. refiner Citgo in U.S. Federal Court in Delaware.
The addition of Rosneft and PDVSA's bondholder collateral trustee GLAS Americas to the lawsuit comes after an investigation by REDD Intelligence and the Latin American Herald Tribune exposed the secret Russian transaction late last month.
A 49.9% stake in the three refineries and the extensive U.S. pipelines owned by Citgo was “used to raise new financing”,PDVSA admitted in a defensive statement after the potential Russian ownership of strategic oil and pipeline assets in the United States made front page headlines around the world.
In its filing (see below) adding Rosneft and Glas Americas to the suit against PDVSA, Crystallex argues that "Faced with the very real prospect that ... the Court could and would enjoin further asset transfers, the PDV Defendants doubled down on their efforts to hinder and delay creditors from being able to collect the monies owed them."
"Specifically, on or about October 24, 2016, PDVH[olding] executed the 'Bond Swap Fraudulent Transfer.' At that time, PDVSA concluded a debt swap exchanging $2.8 billion in bonds maturing in 2017 for $3.367 billion in new bonds maturing in 2020, without receiving any consideration in return. PDVH granted PDVSA's new 2020 bondholders collateral in the form of a 50.1% lien on its shares in CITGO Holding -- its most valuable asset -- for no consideration."
"On November 30, 2016, barely one month later, another UCC-1 was filed against PDVH's shares in CITGO Holding. The new lien covered the remaining 49.1% of the outstanding stock. Again PDVH agreed to pledge its assets for no consideration , this time in support of an agreement between Rosneft, PDVSA , and PDVH's sister, PDVSA Petroleo, S.A."
"Each of these transactions wears several badges of fraud and is done with the intent to hinder and delay Crystallex in collecting on any judgment enforcing the Arbitration Award as well as any judgment this Court may issue.... The PDV Defendants are relentless in their determination to avoid their obligations and remove assets from the reach of U.S. courts as part of an ongoing scheme to frustrate the enforcement of final and binding arbitration awards and any future judgements of this Court. There actions, however, are illegal and should be stopped."
Crystallex is asking the court to cancel the transfer and appoint a receiver or give "a money judgment equal to the value of the transfer should the lien not be cancelled."
Crystallex is also asking for an injunction barring any further transfers of Citgo or from PDVSA, Citgo, Rosneft and the PDVSA bondholders.
In admitting and defending the Rosneft transaction, PDVSA President Eulogio Del Pino also seemed to give weight to the lawsuit's argument by virtually admitting that they had levered up CITGO to prevent the large amount of legal claims coming down against them.
“In no way are we going to use that asset to pay for any kind of toxic practice of oil politics,” Del Pino said on December 27th on state television, referring to pending arbitration cases against the country over the billions of dollars of expropriations.
Foreshadowing the adding of Rosneft to the lawsuit, Crystallex's counsel had written a strongly worded letter to the Court after the transfer was uncovered late last month.
"Despite the fact that PDVH knew that it pledged all of its remaining assets to Rosneft no later than November 30, 2016 (the date on the filed UCC 1), Defendants failed to mention this transfer in response to Your Honor’s question on Tuesday. This is surprising in light of the Court’s questioning and the obvious relevance of the new Rosneft lien to the decision of whether it would be appropriate to stay this action.
Plaintiff respectfully requests that this Court lift the stay of discovery as soon as this Court’s schedule permits and further that this Court order that discovery be expedited so that a final judgment may be reached before Defendants are able to fully dissipate their assets in an attempt to render meaningless any judgment issued by this Court. Although the liens placed on the shares of a Delaware corporation can be undone—and Plaintiff intends to seek such relief with respect to the new liens—Defendants appear intent to do everything possible to deprive this Court of the ability to afford effective relief to Plaintiff at the conclusion of this case. "
CITGO - A Strategic Asset?
A Delaware Uniform Commercial Code (UCC) filing of the lien against Citgo parent PDV Holding, Inc. on November 30 by lawyers for Rosneft was what revealed to REDD and LAHT that Venezuela had mortgaged its Citgo refineries in the United States to Russia's state-controlled oil company Rosneft.
PDV Holding Inc., owned by Venezuela state oil company Petroleos de Venezuela, S.A. (PDVSA), owns Citgo Holding Inc., which in turn, owns Citgo Petroleum Corporation, which has 3 refineries and pipelines throughout the United States.
The lien means that should Citgo or PDVSA default -- and Crystallex (or ConocoPhillips, who is also suing under similar grounds) be unsuccessful in their "fraudulent transfer" claim, Russia's state controlled oil company Rosneft could end up owning strategically important oil refineries and pipelines in the United States.
Citgo owns oil and gas pipelines throughout the country as well as oil refineries in Corpus Christi, Texas; Lake Charles, Louisiana; and Lemont, Illinois (outside of Chicago).
Citgo can refine a total of 749,00 barrels per day from its 3 refineries in the United States. Its largest of the three refineries, located at Lake Charles, Louisiana, can refine 427,800 bpd, making it the 6th largest refinery in the U.S.
The Citgo refinery in Lemont, Illinois, can refine 176,000 bpd, making it the 41st largest in the U.S. Its refinery at Corpus Christi, Texas can handle 158,00 bpd, making it the 46th largest in the U.S.
A factor that makes the refineries unique is that they can refine heavy sour crudes, with 57% of their input being from that cheaper category. In addition, Citgo owns and has shares in terminals and pipelines all over the country.
The Committee on Foreign Investment in the United States (CFIUS) is a U.S. government committee that reviews the national security implications of foreign investments in U.S. companies or operations.
CFIUS is required to investigate proposed mergers, acquisitions, and takeovers where the acquirer is acting on behalf of a foreign government. Since Rosneft is majority-owned by Russia and controlled by a right hand man of Putin, it could potentially qualify for further investigation.
In addition, both Rosneft and Igor Sechin have restrictive sanctions imposed upon them in the wake of the Crimea and Ukraine invasion.
"When China's state-owned oil company CNOOC made an $18.5 billion bid for U.S. oil company Unocal in 2005, Unocal ended up having to accept a lower bid from ChevronTexaco after "political tensions," notes Russ Dallen, who helped uncover and investigate the Rosneft lien.
"But even if a Trump administration that seems to regard Putin as a friend -- despite the experiences of Bush and Obama -- approves the transaction, more likely, as happened in 2006 when CFIUS approved the takeover of P&O (which owned and leased ports and terminals in the U.S.) by state-owned Dubai Ports World (DPW), Congress will move to block it. DPW ended up divesting P&O's U.S. operations to American International Group after the furor," Dallen notes.
The Uniform Commercial Code (UCC) filing is used to protect creditors and let other potential creditors know that they have an interest in the asset.
In October, in addition to a 20% bonus, PDVSA used 50.1% of Citgo Holding Inc. as collateral to induce $2.8 billion of holders of PDVSA debt maturing within the year to extend into a new 4 year amortizing bond. As a result, should PDVSA default, the holders of the new $3.4 billion PDVSA 8.5% of 2020 would be able to take 50.1% of Citgo Holding Inc.
The Rosneft UCC filing meant that 100% of Citgo Holding is now encumbered and potentially at risk.
RUSSIA'S EXPANDING ENERGY FOOTHOLD
Rosneft is a minority shareholder in five joint crude oil-producing companies in Venezuela: Petro Miranda, Petro Victoria, Petro Perijá, Petro Monagas and Boquerón.
In 2010, Venezuela President Hugo Chavez sold PDVSA's stakes in 4 Ruhr oil refineries in Germany to Rosneft for $1.6 billion, giving Rosneft a key foothold in the European market.
"Last week, Rosneft managed to gain control of the shares in Ruhr Oel that it did not yet own," points out Dallen. "As a result, Rosneft is now the third largest refiner in Germany -- an aggressive expansion by Rosneft that we are seeing all over the world."
Founded in 1992, Rosneft became the world's biggest oil and gas producer by volume (5.2 million barrels per day) through acquiring others. In 2004, Rosneft took over competitor Yukos after Vladimir Putin jailed Yukos head Mikhail Khodorkovsky and in 2013 Rosneft took over TNK.
In 2014, Rosneft took over Bashneft after its owner, too, was arrested.
BP owns 19.75% and a consortium of mining and trading firm Glencore and the Qatar Investment Authority just paid Russia $11.3 billion for 19.5% of Rosneft. Another 10.75% floats on the Russian stock exchange.
The Russian government owns the remaining 50% of Rosneft, and Rosneft head Igor Sechin is a long-time ally and assistant to Russian President Vladimir Putin.
In October, Rosneft acquired Indian refiner Essar Oil in a $13 billion deal. The transaction included India's second-largest refinery at Vadinar (400,000 bpd), as well as port terminals, power plants and pumps.
Earlier this month, Rosneft acquired 30% of the Shourouk concession in Egypt and its supergiant offshore Zohr gas field from Italy's Eni SPA for $1.575 billion.
And it is now the third largest refiner in Germany.
In spite of European and U.S. sanctions on Rosneft and its head Sechin over the annexation of Crimea, Dallen points out that Rosneft has made billions of dollars in overseas acquisitions this year in addition to raising billions from an equity sale to Glencore and Qatar.
"Even as sanctions against them continue to be renewed, it is clear that the Russians are using Rosneft to further Putin's geopolitical ambitions," says Dallen. "But will the U.S. government stand for a country with which we have an increasingly adversarial relationship owning strategic energy assets in the United States? It could be an early test for a Trump administration that has seemingly conflicting viewpoints and relationships with Russia."