In 1997, one of every 10 gallons of gasoline U.S. drivers
bought came from a Venezuelan-owned refiner, Citgo Petroleum
Corp. That year, a student at Oxford University wrote a thesis
saying Citgo was cheating Venezuela's people by investing too
much in the U.S., and should send more cash home.
The
student, Juan Carlos Boué, drew scant attention
until four years ago, when Venezuela's populist president,
Hugo Chávez, took control of the state oil apparatus.
Today, Mr. Boué is an influential member of Citgo's
board. And Citgo, which Venezuela bought two decades ago to
market its hard-to-refine heavy oil, now has a different focus:
feeding cash to Mr. Chávez's program to build socialism
in Venezuela.
In recent years, while other U.S. refiners have invested
heavily to take advantage of historically wide profit margins
in the business, Citgo has been slimming down. It has slashed
its investment and sold off U.S. assets, most recently by
agreeing last week to shed a unit that turns crude oil into
asphalt. In keeping with Mr. Boué's nostrums, Citgo
has sent the extra money to its sole shareholder, the Venezuelan
government. Citgo has raised its annual dividend to more
than $2 billion, from $225 million in 2000.
The changes at Citgo are altering the U.S. fuel landscape.
Citgo owns 5% of U.S. refining capacity, a significant chunk
at a time when U.S. demand for fuel is growing faster than
domestic production, and no new refinery has been built in
three decades. Citgo's production will stagnate, adding to
pressure on pump prices and fuel imports.
Citgo's
U-turn mimics changes at its corporate parent, Petróleos
de Venezuela SA, known as PDVSA. Mr. Chávez has staffed
the national oil company with political allies and spends some
$14 billion a year of its profits on social programs. Shorn
of investment, PDVSA has seen its oil output plunge.
The strategy also contrasts with those of some other national
oil companies, such as Saudi Arabia's and Brazil's, which invest
heavily in both production and refining.
Citgo
declined to reply to questions about its strategy. Neither
PDVSA nor
Venezuela's Ministry of Energy and Mines responded
to requests for comment. Mr. Boué, who is 41 years old,
said in an email that "an objective is certainly to maximize
dividends, but never at the expense of the integrity of the
operations." Speaking of Venezuela's ownership of Citgo,
he said, "During 20 years we put in huge amounts of money
without receiving anything in return."
In the past, Citgo has said selling assets allows it to focus
on its most profitable ventures. Industry experts say Citgo
is a moneymaker. Citgo has not disclosed financial data since
2005, when publicly traded bonds were paid off, ending the
need to report to the Securities and Exchange Commission. Citgo's
last public filing showed profit of $419 million on revenue
of just under $31 billion in the first nine months of 2005.
The
downsizing is part of broader changes at Citgo. After first
investing
in Citgo 21 years ago, Venezuela for years
let Americans run it. But under the Chávez regime, Citgo
has had four Venezuelan CEOs in six years, one a former general
from the army, where Mr. Chávez began his career. Gracing
Citgo's Houston offices today is a large statue of an oil worker,
a woman and a machete-wielding peasant, a symbol of the Chávez
revolution. Citgo has a new board that includes, besides Mr.
Boué, a cousin of Mr. Chávez and a French-born
Marxist mathematician.
This board has become the key policy-making body, keeping
U.S. managers in the dark about long-term strategy, say some
current and former employees.
When
Venezuela relocated Citgo's headquarters to Houston from
Tulsa, Okla.,
in 2004, nearly half of the employees chose not
to move. Almost all high-ranking American executives have since
left. When they go, they must sign agreements promising not
to criticize Citgo in public, former executives say, in accord
with what some describe as a growing culture of secrecy at
the company. "It's like a police state," said one,
a Venezuelan.
Taking
its cue from PDVSA, Citgo has increased its social spending.
Last winter, Citgo provided cut-rate heating oil
to 1.2 million low-income Americans. The program enabled Mr.
Chávez to score political points about continuing poverty
in one of the world's richest countries.
The
fiery Venezuelan's political grandstanding has been a headache
for some who run franchised Citgo gas stations. After
he labeled President Bush "the devil" in a speech
at the United Nations last year, an Internet-led movement arose
to boycott Citgo stations. In rural Alabama, a billboard put
up in recent weeks picturing Mr. Chávez read: "Don't
buy gas from this Ass." It's hard to tell how much effect
the movement has had, but in Monroe, La., Bennie Evans, owner
of 120 Citgo stations, is switching many to other brands. "Customers
were not coming back. We got tons of hate emails," he
says.
Citgo's relationship with Venezuela began in the mid-1980s,
when the country was finding its heavy grade of crude a tough
sell because many refineries couldn't process it and lighter
oil was plentiful. The state oil company, PDVSA, decided the
oil would be an easier sell if first turned into products like
gasoline. It went looking for a refiner and found Citgo, then
a one-plant company owned by the operator of 7-Eleven stores,
Southland Corp. PDVSA bought half of Citgo in 1986 and the
rest four years later.
PDVSA agreed to supply Citgo with crude. The contract based
the price Citgo paid not on spot-market prices, as many such
deals do, but on the prices of refined products. Former executives
say this was to ensure a profit for Citgo, which was going
to have to make extensive refinery upgrades.
At
first, the deal brought Venezuela a higher price for its
oil than
it could have gotten on the spot market, and Venezuela
left Citgo alone. "We were very careful to keep the fewest
number of Venezuelans there because it was a U.S. company," says
Luis Giusti, president of PDVSA in the 1990s. Besides investing
in its plant, in Lake Charles, La., Citgo acquired five more
U.S. refineries. It expanded its fleet of franchised Citgo-branded
gasoline stations to 13,000.
Reinvesting
profits in the U.S. made sense for tax reasons, according
to former executives. They say sending the profits
to Venezuela would have resulted in double taxation, because
the U.S. and Venezuela didn't have a treaty to offset each
other's taxes. Mr. Boué says they could have avoided
the tax hit by sending the profits via a PDVSA subsidiary in
the Netherlands, which did have a tax treaty with America,
and then on through to Venezuela by way of Curacao.
The economics shifted in the mid-1990s. The price of refined
products dropped, with the result that PDVSA started getting
less for its crude oil by marketing it through Citgo than it
could have on the spot market. From 1993 to 2003, PDVSA got
about 50 cents to $4 below the spot-market price from Citgo
under the supply arrangement with three of its refineries,
according to company documents reviewed by The Wall Street
Journal. The documents indicate that the discounts amounted
to $2.55 billion over most of those supply contracts' life.
In
Venezuela, where the popular mood was sour after a series
of economic
crises, a perception grew that Citgo was a bad
deal. Even before Mr. Chávez's election in 1998, it
had become harder for Citgo to get approval for new projects.
In his campaign, Mr. Chávez suggested that Venezuelan
oil men were using Citgo to hide money from the country. His
views fed into a debate that had raged for years between the
oil establishment and the country's left wing, which said PDVSA
should focus its investments at home.
Mr.
Boué, as a student in his home country of Mexico,
had weighed in on this in a thesis that was published in 1995,
while he was working at Mexican state company Petróleos
Mexicanos. He argued that Venezuela didn't need foreign refineries
and should simply sell its oil on global markets. Two years
later, Mr. Boué elaborated in a dissertation he wrote
for his Ph.D. at Oxford. He said any oil producer that wants
to guarantee the sale of a certain amount of crude can simply
offer it at a slightly lower price than others.
"Acquiring and managing refineries is ... a very expensive
enterprise," Mr. Boué wrote. "Selling crude
by means of discounts is both simple and cheap."
He
pitched his ideas to PDVSA but was ignored. Former officials
there
say Mr. Boué hadn't taken into account how trying
to sell a large amount of heavy crude on the spot market would
affect the price -- namely, by driving it lower. "Boué's
arguments were simply wrong," contends Ramón Espinasa,
a former PDVSA chief economist.
Mr.
Boué,
citing his own experience at Pemex, says it's untrue that
PDVSA would have depressed the market by placing
its heavy oil in the market, adding that he never advocated
selling it on the spot market but instead by contract.
Former
PDVSA officials also say that in criticizing Venezuela's
ownership of a U.S. refining operation, Mr. Boué didn't
take into account its value as an investment. PDVSA bought
Citgo for $951 million. A former Citgo executive says its value
is now about $14 billion. Mr. Boué's reply to that is
that PDVSA paid much more than $951 million for Citgo if one
takes into account the oil-price discounts, the interest PDVSA
could have earned on money lost through the discounts, and
investments made in Citgo.
Mr.
Chávez, as Venezuela's president, initially had
difficulty changing Citgo. His envoys to the company usually
ended up supporting it. For instance, in 2003 the Venezuelan
oil ministry sent an executive named Luis Marín to run
Citgo, urging him to sell it. But Mr. Marín saw that
the refining business was improving and urged that Citgo be
expanded instead.
Mr.
Boué, meanwhile, had joined a think tank called
the Oxford Institute for Energy Studies. There he met Bernard
Mommer, a French-born Marxist academician who was part of the
Chávez political entourage. Thanks to Mr. Mommer, Mr.
Boué's ideas finally caught the eye of Venezuela's energy
minister, Rafael Ramírez, and Mr. Ramírez hired
him to do a study of Citgo.
Mr.
Boué's conclusions, published in 2004, echoed what
he'd been saying all along about Citgo not sending home enough
of its profits. Early the following year, Mr. Chávez
fired Mr. Marín, the Citgo chief who wanted to expand
the company, and replaced its entire five-member board, putting
Messrs. Boué and Mommer on it.
The new board changed things quickly. U.S. executives of Citgo
had always participated in board meetings. Now they make brief
presentations and must leave, former executives say.
The former executives contend the goal of maximizing payments
to Venezuela is so strong that many worthwhile investments
are scrapped. In 2005, U.S. executives wanted to invest in
a project involving cogeneration, a process that produces heat
and power at once, and claimed the project would produce a
60% return on investment. The board rejected it.
Mr.
Boué said many of the arguments to support the
project were "very feeble," and "the executives
could not convince the board." He added, "I'm only
a director at Citgo, and certainly not an eminence grise pulling
the strings backstage."
Citgo has delayed refinery upgrades required by the U.S. government
to produce cleaner fuels. Some analysts say this raises a risk
of Citgo's not being able to finish in time, because projects
are becoming more expensive and materials and labor harder
to come by.
Citgo has sold interests in pipelines and terminals, and last
year got rid of its share of a refinery co-owned with another
refiner. Now it is selling its asphalt business, for $550 million.
Citgo
had started that operation in 1991 to refine super-heavy
grades
of Venezuelan oil into material to coat U.S. roads and
rooftops. Citgo Asphalt Refining Co. became the largest asphalt
supplier on the East Coast, and Citgo set plans to expand it
further. After Mr. Boué arrived at the Citgo board,
the plans were scrapped, former executives say. Now, instead
of making asphalt out of a sludgy crude called boscan, Venezuela
mixes the sludgy material with light crude and sells it to
China, a former executive says.
The
strategy has faltered. Shipping crude to China is costly,
and using
valuable light oil to thin out boscan results in
a mixed crude that doesn't fetch high prices. Boscan inventories
are piling up. Mr. Boué says the accumulation is seasonal
and isn't related to the decision not to expand the asphalt
refiner.
By largely avoiding U.S. investment, Citgo didn't fully exploit
a refining boom of which other companies took full advantage.
Citgo's capacity barely grew, and then declined 12% with last
year's sale of a co-owned refinery. Citgo found itself having
to buy gasoline on the open market to supply some gas stations.
So last year it shed about 1,800 of the franchised stations.
They now total about 8,000, down about 50% from their 1990s
peak.
Citgo's
strategy is in sharp contrast to that of, for instance, the
big refiner Valero Energy Corp. Valero expanded its capacity
twentyfold during the past few years' boom, acquiring numerous
additional refineries. Says one former high executive at Citgo: "The
sad thing is, we had a chance to become the Valero of the refining
industry, and we missed it." Copyright © 2007
Dow Jones & Company, Inc. All Rights Reserved
