Has Citgo become a political tool for Hugo Chávez?

By David J. Lynch | USA TODAY

Posted 1/11/2006 11:16 PM | Updated 1/12/2006 4:19 AM | HOUSTON — From the glass-walled building and manicured lawn to the security guard who greets visitors in a cheerful Texas drawl, everything at Citgo Petroleum seems perfectly ordinary.

But in fact there's nothing ordinary about Citgo. One of the USA's largest refiners, Citgo is a subsidiary of Venezuela's state-owned oil company, Petroleos de Venezuela S.A. (PDVSA). As such, it ultimately belongs to Venezuelan President Hugo Chávez, an avowedly anti-American leader who counts Fidel Castro among his closest friends and mocks President Bush as a "genocidal murderer."

The question of Chávez's influence over Citgo was highlighted by the company's recent provision of 25 million gallons of subsidized home-heating oil to poor people in the northeast USA. More than 100,000 households in four states should eventually benefit from the low-cost heating aid.

But some worry that Venezuela's ownership of more than 6% of U.S. refinery capacity gives Chávez, a former paratrooper given to wearing red berets and military fatigues, the power to cripple as well as comfort.

As Hurricanes Katrina and Rita demonstrated, any disruption to the nation's refining industry instantly increases gas prices. What if Chávez, who periodically threatens to curtail oil shipments to the USA, closed Citgo's refineries?

"He'd only have to do that for 90 days, and he'd destroy our economy," worries Matthew Simmons, a prominent energy investment banker. "He actually has our livelihood in his hands."

Others note that imported oil from elsewhere eventually could compensate for any interruption in Citgo supplies. And, because Chávez depends on the company's specialized refineries to process Venezuela's sulfur-rich crude oil, a shutdown would cost him and his country dearly.

"His capacity to make life difficult for George Bush would be at the cost of burying himself," says Claudio Loser, a former International Monetary Fund official.

Late last year, as winter's first chill sent consumers reaching for their thermostats, a dozen U.S. senators asked 10 major oil companies to donate a portion of their record profits to help the poor. Only Citgo responded, dispatching tankers to housing projects in New York and Massachusetts in what Felix Rodriguez, the company president and chief executive, called a purely "humanitarian" gesture.

Today, the program expands to homeless shelters and Native American tribes in Maine. Friday, Rhode Island gets its initial delivery.

Many analysts, however, saw the move as a stunt by Chávez aimed at embarrassing the Bush administration. And some say Citgo's generosity — likely to cost it more than $20 million — suggests the company may be turning into a political tool for Chávez.

"It has had a turn for the worse, perhaps the much worse. ... Now it's a different entity. It's not completely run like a business," says Antonio Szabo, a former PDVSA official and the president of Stone Bond Technologies, a Houston energy software firm.

Citgo executives say the company, founded in 1910 as Cities Service Co., is solidly profitable and can afford to offer the poor 40% discounts on heating oil. In an interview, Rodriguez said Chávez, 51, ordered the giveaway so poor Americans wouldn't have to choose between food and heat.

"The only difference between Citgo and other companies is that Citgo has only one shareholder," he said, referring to the Venezuelan president.

State Department spokesman Adam Ereli welcomed the heating aid, saying, "Citgo is an American company. They are helping Americans in need. That is a good thing."

Earlier, the company's Hurricane Katrina aid efforts earned a nod from Bush. "The good works of Citgo demonstrate the character and great strength of our nation," the president wrote Citgo Sept. 27.

About Citgo Petroleum

Yet, there are echoes in Citgo's recent performance of what has transpired elsewhere in Venezuela's oil industry since Chávez was elected in 1998. After a coup in 2002 briefly ousted him from power, Chávez retaliated by purging the state-owned oil company. Thousands of veteran executives and petroleum engineers were cashiered, replaced by those politically loyal to the president's revolutionary aims.

Anti-American foreign policy

Today, PDVSA's oil production is down to 1.5 million barrels a day from 3.3 million barrels in 1999, says Luis Giusti, who quit as national oil company president when Chávez took over. But thanks to oil prices above $60 a barrel, Chávez's control of PDVSA has allowed him to lavish billions of dollars on social projects and an anti-American foreign policy.

Citgo, which sells gasoline through more than 13,500 retail stations and is known for its iconic sign towering over Fenway Park's left-field wall, paid the Venezuelan government $697 million in dividends in 2005, up from the previous year's $400 million, Rodriguez said.

PDVSA — the acronym is pronounced Ped-a-vay-sa — first acquired 50% of Citgo in 1986. Four years later, the Venezuelans bought the remaining half of the company from Southland, better known for its ownership of the 7-Eleven convenience stores. The company's six refineries, with a capacity of 1.1 million barrels of oil a day, are ideally suited for Venezuela's sulfurous, heavy crude oil.

Throughout the 1990s, Venezuelan oil officials allowed the company's American managers enormous autonomy. "Citgo was an American company. We happened to own it," said Giusti, who headed PDVSA until Chávez took over. "We managed it at arm's length."

That changed under Chávez. In October 2000, the new president tightened control over Citgo by naming as company president a former army general, Oswaldo Contreras. He was the first Venezuelan to hold the position.

Bush was elected president the following month, but relations didn't completely sour until after Sept. 11, 2001, when Chávez likened the U.S. war in Afghanistan to the terror attacks in New York. Washington later publicly welcomed the coup that toppled him for two days in 2002. Chávez has accused the Bush administration of planning his assassination.

In November, two weeks after leading anti-American protests at a hemispheric summit in Argentina, Chávez told a business group in Caracas: "The planet's most serious danger is the government of the United States. ... The people of the United States are being governed by a killer, a genocidal murderer and a madman." The comment followed congressional testimony by a State Department official that labeled Venezuela "a threat to regional stability."

Asked how the persistent bilateral friction was affecting Citgo, Rodriguez replied, "No effect. Nothing at all." But Chief Operating Officer Jerry Thompson, the most senior American remaining at the company, acknowledged Citgo's customers are concerned. "What it introduces is an element of anxiety, and our competition takes full advantage of that," he says.

The uncertainty was exacerbated for much of last year by a protracted and costly relocation of corporate headquarters, management upheaval and Venezuelan officials' repeated suggestions that they might sell some or all of Citgo.

After decades in Tulsa, Citgo last year completed an $82 million shift to its new five-story headquarters in the heart of Houston's Energy Corridor. The move was designed to benefit the company by planting it squarely in the world's self-proclaimed "energy capital."

But asked whether the move was worth the cost, Thompson says, "In my personal opinion, no."

New management team

The relocation also cost the company managers who opted not to leave their longtime home, compounding executive turnover that saw several top American executives and the entire board replaced with Venezuelans.

Giusti, the former PDVSA president, says the current Venezuelan management team is weak. He criticized CEO Rodriguez for lacking substantial international experience and fluency in English. "Felix Rodriguez belongs to a group of engineers who never made it to the top. They only took their positions as a result of being loyal to the revolution of Chávez," he says.

In an interview, Rodriguez, 56, noted he is a petroleum engineer with 32 years experience. Speaking in heavily accented English, with occasional help from an interpreter, he said he had held a series of planning and supervisory positions, traveled to the North Sea oil fields on "special assignment" and had been vice president of PDVSA before being named Citgo's CEO.

Even as Rodriguez moved into the top job, Venezuela's energy minister said he was discussing a sale of some or all of Citgo with "several companies." But Rodriguez says there are no sales plans and despite political tensions between Washington and Caracas, the commercial relationship remains "win-win."

Profit lags behind some rivals

Citgo executives also point to their financial record to rebut suggestions that politics are taking precedence over profits. For the first nine months of 2005, the company reported net income of $419.3 million on revenue of $31 billion compared with $430.3 million in profit on revenue of $23.7 billion for the same period last year.

Asked if he was satisfied, Rodriguez replied, "So far, so good." Thompson said the company enjoyed a strong fourth quarter that will push net income above last year's figure. But at a time when industrywide profit margins are fat, some competitors have done much better. Industry leader Valero, for example, earned $2.7 billion on $56.3 billion in revenue for the same period. For every sales dollar, Valero earned 4.7 cents in profit. Citgo reaped just 1.3 cents.

Citgo's most notable recent financial deal involved refinancing its outstanding corporate debt. In October, the company secured bank financing of $1.85 billion, which it used to pay off its bond holders. Among the bonds paid off was an issue of $250 million in 6% senior notes the company had issued just one year earlier.

The move was the corporate equivalent of refinancing a home twice in 12 months. "They did what we thought was a fairly strange thing," said John Addeo, portfolio manager for the MFS High Income fund, which owned $5.7 million of Citgo bonds.

Citgo says it refinanced to obtain greater financial flexibility. The terms of its bond offerings restricted the company's ability to take actions, such as selling assets and paying dividends, according to filings with the Securities and Exchange Commission.

Meanwhile, company executives say drivers pulling up to Citgo gas pumps aren't worried about who owns the refineries that produce the gas. "Being owned by a political entity ultimately means, from time to time, you have to do things with a political bent to them. Heating oil is an example of that," says Thompson. But "By and large, people see us as an American company."

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Has Citgo become a political tool for Hugo Chávez?

By David J. Lynch | USA TODAY