(Reuters) The battle for Citgo: How Venezuela’s opposition leaders seized control

(Reuters)

(Reuters) – Asdrubal Chavez, chief executive of Houston-based Citgo Petroleum Corp, boarded the Venezuelan-owned firm’s corporate jet in Caracas on Jan. 30, after meeting with top officials of the embattled administration of socialist President Nicolas Maduro about the latest U.S. oil sanctions.FILE PHOTO: The corporate logos of the state oil company PDVSA and Citgo Petroleum Corp are seen in Caracas, Venezuela April 30, 2018. REUTERS/Marco Bello/File Photo

Upon landing in the Bahamas – where Chavez has worked for about a year after being denied a U.S. visa – he had received word from Houston that it would be his last trip on a company plane and that his Citgo email account had been shut off.

Day-to-day control of the company had passed to Citgo’s top U.S. executive, Rick Esser, who with the backing of Venezuela’s rising political opposition and the U.S. government would begin clearing the way for a new, anti-Maduro board of directors at Citgo. Esser oversaw the moves to isolate Chavez – a cousin of the late Venezuelan President Hugo Chavez – and would soon start ousting other Citgo executives close to the Maduro administration.

The house-cleaning at the prized U.S.-based subsidiary of Venezuela’s state-owned oil firm, Petroleos de Venezuela (PDVSA), marked a crucial early victory for the country’s rising opposition government – led by self-declared president Juan Guaido – as it struggles to remove Maduro from office and break his grip on the OPEC nation’s oil assets.

The account of the transition of power at Citgo is based on Reuters interviews with more than a dozen current and former Citgo and PDVSA executives, employees, and U.S. and Latin American advisors.

Guaido, head of the Venezuelan congress, announced he would seize the presidency on Jan. 23 because Maduro’s re-election last year was a sham, rendering the socialist leader illegitimate under Venezuela law. Guaido’s claim to interim leadership, until fair elections can be held, was quickly backed by the United States and dozens of other nations.

But Maduro remains in control of the military and PDVSA – making Citgo the obvious first target among national asset for Guaido’s opposition movement to claim, with the help of the U.S. government. The battle for Citgo could prove pivotal in the effort to unseat Maduro because full control of a major U.S. refiner would provide a crucial source of revenue to a post-Maduro administration.

Citgo, with more than $23 billion in annual sales and operations that supply about 4 percent of U.S. fuels, may be the last remaining asset owned by PDVSA with a healthy balance sheet. As PDVSA’s oil production and revenue have plummeted amid crippling debt, mismanagement and international political pressure, Citgo’s U.S. location and financial independence have shielded the firm from the worst of its parent company’s meltdown.

At the end of September, Citgo had net income of about $500 million, according to a creditor with access to financial statements that are not public. The company had almost $500 million in cash and an available credit line of $900 million.

(Graphic: An interactive look at Venezuela’s crude exports to the United States – tmsnrt.rs/2S4YIXB)

Inside Citgo’s Houston headquarters, many employees weary of operating under the control of a failing socialist state eagerly awaited an expected official announcement of the appointments of new company directors, who were chosen by Venezuela’s congress.

“We are not expecting any resistance” to the new board inside the company, said one manager who spoke on condition of anonymity. “On the contrary, we are waiting for directions to lay out the red carpet.”

The new board met together for the first time in Houston on Thursday and named executives to replace those who were ousted.

Board directors and a new executive team was confirmed by Citgo in a statement on Friday. Esser assumed responsibility for day-to-day strategic decisions and operations while a search for a new CEO has begun, it said, without mentioning former CEO Chavez.

“These officers were chosen not only for their experience and knowledge, but also because of their demonstrated commitment to the company over the years,” said Chairwoman Luisa Palacios in the statement.

PDVSA and the White House did not respond to requests for comment.

(Graphic: Citgo’s Louisiana refinery was 2018’s top U.S. consumer of Venezuela’s crude – tmsnrt.rs/2t4ullS.)

SHIFTING ALLEGIANCES

As U.S. sanctions on Jan. 28 shifted the balance of power to Citgo’s anti-Maduro faction of executives, Maduro loyalists scrambled to find their place in the emerging corporate structure.

Two of four senior executives appointed by Chavez openly pledged support for the incoming board of directors in meetings with employees, said two sources who attended the meetings.

But all four – Frank Gygax, Nepmar Escalona, Simon Suarez and Eladio Perez – were escorted out of the building on Monday, according to four people with knowledge of their departures. Gygax declined to comment and the others did not respond to requests.

It is unclear whether Chavez has yet been formally terminated, an action that can only be taken by company directors, but he has been effectively shut out of the firm, Citgo employees said. Chavez did not respond to a request for comment.

Esser has essentially run the company since Chavez’ ouster, in close consultation with U.S. government officials, according to three Citgo employees and two people close to the incoming company board.

A Jan. 30 meeting between White House National Security Advisor John Bolton and Citgo executives thrust the low-key Esser into the spotlight after Bolton tweeted a photo of the meeting, calling it “very productive.”

U.S. officials have voiced concern that Guaido and his supporters had been too slow in seizing control of Citgo and also have pushed for a say in choosing members of the refiner’s new board – a request Guaido’s team declined, according to two people familiar with the talks.

Since clearing Citgo’s upper ranks of Maduro allies, Esser has focused on securing alternatives to the Venezuelan oil that feeds its refineries. Recent U.S. sanctions prevent the firm from importing Venezuelan crude after April 28, which could cripple the company unless it can ensure it has the cash, credit and contracts for alternate supplies.

Advisors to the incoming Citgo board have separately urged U.S. officials to exempt Citgo from sanctions and protect its assets from creditors once it is officially controlled by Guaido’s team.

Esser saw this crisis coming two years ago and put together a group to find new suppliers and test their oils in the event Venezuelan crudes were restricted by sanctions, according to a person familiar with the effort.

The firm’s efforts to sustain operations face a threat from creditors owed money by Venezuela and PDVSA, who could try to use that leverage to hamstring Citgo’s finances, said Carlos Jorda, a former Citgo chairman and now a Houston business consultant. The U.S. government could help the company hold off that threat, he said.

“The U.S. Treasury could say, ‘Hold your horses, you’ll get paid – but not paid by Citgo, but by Venezuela – when the Maduro regime exits,’” Jorda said.

Esser and Citgo finance executive Curtis Rowe traveled to Washington this week to meet with U.S. government officials for at least the second time in three weeks, according to two Citgo employees.Slideshow (2 Images)

‘FROGS AND SNAKES’

Opposition leaders had difficulty recruiting candidates willing to join the new Citgo board, according to three people familiar with the recruitments.

“There are many risks,” one of the people said, “and if these people have family members in Venezuela, they could be putting them at risk, too.”

In late 2017, six Citgo executives were called to Caracas and jailed amid a graft probe over a failed debt refinancing. Their detention led to Chavez’s appointment as CEO and the arrival of several Maduro loyalists at Citgo’s Houston headquarters.

New Citgo Chairwoman Palacios has been huddling with newly appointed directors and legal advisers to guard against the threat of a potential U.S. court challenge by PDVSA to the new board’s legitimacy, according to two sources close to her team.

Palacios and other board members, which include former Citgo and PDVSA executives living in the United States, did not respond to requests for comment.

One of their priorities will be to audit the finances of a refinery project in Aruba, said the two people close to Palacios. PDVSA and Citgo agreed to a $685 million overhaul of the idled facility in 2016, causing some Citgo executives to resign in protest, arguing the deal made no business sense.

On Monday, Citgo Aruba Refining officially put the money-losing venture on hold and laid off workers, citing the impact of U.S. sanctions on PDVSA. The project has been clouded by corruption allegations, according to four former and current Citgo employees and two people close to the new Citgo board.

“There is also worry about the audits to come. We are expecting ‘frogs and snakes’ to come from there,” said a Citgo employee, using a Venezuelan figure of speech similar in meaning to the opening of a Pandora’s box.

REDECORATING

Since Esser took over Citgo operations, the company has sent clear signals of a return to its century-old American roots.

“We the people of Citgo have a story to tell you” read an advertisement in Tuesday’s Washington Post, borrowing language from the U.S. constitution. The text emphasized the firm’s 6,000 U.S. workers, fiscal strength and U.S. charity work.

Workers at the company’s Houston headquarters also have purged the company website and marketing materials of references to PDVSA and stripped the building of the symbols of Venezuela’s socialist government.

For years, the hallways have been decorated with renderings of a controversial painting of Latin American independence leader Simon Bolivar that had been commissioned by former president Hugo Chavez – and looked more like Chavez than any historical Bolivar painting.

The portraits began to disappear, Citgo employees said, soon after Venezuela’s congress appointed the company’s new board of directors.