Venezuela Debt Update: Recent Developments in Arbitrations that Could Impact Restructuring Efforts
It’s hard to find something positive to write about Venezuela. Some basic facts tell the story of the misery there.
Consumer prices this year might rise one million percent. The minimum wage was increased by 3,000 percent so that seven million workers will now receive $20 a month. And many others live on just $2 to $8 a month and eat one meal a day. The poverty rate is a crushing 82 percent. Medicine is scarce.
Venezuela has the world’s largest oil reserves, but oil production this year might be the lowest since 1947. And the country suffers with a reported debt burden of $150 billion. Sanctions imposed last year by the U.S. bar its citizens from trading new debt issued by Venezuela or its state-owned oil company, Petroleos de Venezuela (“PDVSA”), and prohibit U.S. banks from buying bonds and negotiating with Venezuela.
Corruption and cronyism first under President Hugo Chavez and now President Nicolas Maduro are a fact of daily life. Starting in 1999, the country expropriated $17 billion in private assets. Multiple arbitrations against Venezuela and PDVSA followed.
The future of the country will depend on many factors, including how the legal proceedings are resolved, the ability of Venezuela to restructure its debt, and its bilateral relations with China and Russia. This post summarizes recent developments in arbitrations and litigations that could impact restructuring efforts.
One of the biggest stories involves Crystallex International Corp., a Canadian entity. In 2011, then President Hugo Chavez nationalized a gold mine in Venezuela owned by Crystallex. In 2016, Crystallex brought an arbitration against the country before the World Bank International Center for Settlement of Investment Disputes (“ICSID”) and was awarded $1.2 billion, plus $200 million in interest.
The award was confirmed in federal court in D.C., and Crystallex sought to enforce it in federal court in Delaware. In August, U.S. District Judge Leonard Stark issued a 75-page opinion that allows Crystallex to attach shares of PDV Holding (“PDV-H”), a Delaware Corporation and a subsidiary of PDVSA. PDV-H’s sole asset is its 100 percent ownership of Citgo Holding, which owns Citgo, the oil company based in Houston.
Venezuela didn’t appear in the case but PDVSA did. Judge Stark ruled that Venezuela and PDVSA were alter egos of one another based on Venezuela’s control of PDVSA. PDVSA has appealed the decision to the U.S. Court of Appeals for Third Circuit; bondholders have intervened in the case; and motions to stay enforcement of the decision have been filed. Judge Stark will hear the parties on December 20 and decide next steps.
The significant name in this case and others is Citgo. It owns three refineries in the U.S., pipelines, and distribution terminals, and sends 29,000 barrels of refined oil a day to Venezuela. And holders of 8.5% senior secured 2020 bonds have a 51% stake in Citgo Holdings. That is why some large holders have intervened in the Delaware proceeding.
Also in 2011, Venezuela nationalized a gold mine owned by Rusoro Mining Ltd. Rusoro went to arbitration before the ICSID and got a $1.2 billion award in 2016 that was confirmed this year in federal court in D.C. Last week, Venezuela and Rusoro reached a settlement. The parties might start a partnership to reopen the company’s gold mining projects in Venezuela. Rusoro reportedly also has been pursuing Citgo’s assets.
Another key case involves ConocoPhillips. In 2007, Venezuela nationalized ConocoPhillips’ facilities located there. Conoco sought relief in the International Chamber of Commerce and was awarded $2 billion. In 2018, Conoco disrupted PDVSA assets — inventories, cargoes, and terminals — on the Dutch Caribbean islands of Bonaire and St. Eustatius. These facilities are crucial to Venezuela because they process nearly a quarter of the country’s oil exports.
Two months ago, Venezuela and Conoco reached a settlement. Venezuela has agreed to pay Conoco $5 billion over five years, with the first payment of $500 million due next month. And Conoco announced that it would suspend its legal enforcement actions. This should enable Venezuela to increase its oil exports from the two Caribbean islands. Conoco has another proceeding at the ICSID concerning the nationalization of two oil projects. Conoco seeks an award of $6 billion. Reports say a decision could be issued before year end.
We will continue to follow these and other proceedings, with an eye towards how Venezuela’s debt might be restructured and more.
To learn more and hear my recent "Expert Webcast" roundtable discussion on the Venezuelan Debt Crisis, please click here.