Venezuela’s foreign creditors have long had their eyes on Citgo Petroleum Corp., the US—based refiner that is the South American country’s largest overseas asset. After a lengthy legal battle, Citgo finally seems within their grasp with a court-ordered auction process set to begin next month.

But now the sale may have hit a $40 billion roadblock.

That’s the amount of a bond that Citgo’s direct US parent, PDV Holding Inc., says will have to be posted by their overall parent, Venezuelan state-owned oil company Petroleos de Venezuela SA, or PDVSA, before PDVH will issue replacement stock certificates required for the auction to go forward. PDVSA has already said it can’t pay any bond due to US sanctions on Venezuela.

Creditors say the demand is aimed at slowing or halting the Citgo auction, which could raise some $14 billion to cover arbitration awards issued against Venezuela as well as other claims arising from a wave of nationalizations begun by late President Hugo Chavez in the 2000s. Miguel Estrada, a lawyer for one of the biggest creditors, said earlier this month that the bond demand was artificially high and likely intended to “derail the sale.”

Representatives for PDVH didn’t respond to requests for comments, but the firm has said in court filings that the bond is required under the law. A Delaware Chancery Court judge authorized to order the issuance of the stock certificates will hold a hearing on the matter on Friday.

Opposition Control

Like the tortuous litigation itself, the bond complication stems from the fraught relations between the US and the socialist Venezuelan governments of Chavez and his successor, President Nicolas Maduro. Due to US opposition to Maduro, PDVH and Citgo are now no longer directly controlled by PDVSA.

In 2019, after Maduro declared victory in a controversial election, the US and several other countries chose to instead recognize Venezuelan opposition leader Juan Guaido as the legitimate president. Citgo, PDVH and other foreign assets were put under the control of a shadow administration led by Guaido, while PDVSA remained in the hands of Maduro’s government in Caracas. The Guaido administration was dissolved earlier this year, but the Venezuelan opposition continues to control PDVH, with board members located both in Venezuela and the US. 

But neither PDVH nor PDVSA wants to see Citgo sold to the highest bidder, and both have aggressively litigated against the creditors to forestall that outcome. Wracked by economic crisis, Venezuela has become even more dependent on its oil industry and the Citgo refineries that turn its heavy crude into gasoline and other salable fuels.

The stock certificates now at issue would be replacements for originals that PDVH says it can’t find. “There is a very real possibility the certificate may be in the hands of the Maduro regime in Caracas or otherwise could have found its way into the hands of a third party,” PDVH said in an Aug. 25 filing. 

PDVH says Delaware corporate law requires a bond to cover any future liability over the re-issuance of corporate paperwork. In the Citgo case, post-auction challenges to the validity of the replacement certificates could expose PDVH to billions of dollars in damages, its lawyers said, necessitating a bond of between “$32 billion and $40 billion.”

But the party most likely to sue PDVH over the reissued certificates is also the party that would be required to post the bond: PDVSA. 

‘Excessively High’

Lawyers for PDVSA have made it clear that they believe asking the sanctioned state-owned company to post a $40 billion bond is a non-starter. “Even if PDVSA were capable of providing an indemnity bond,” PDVH’s request “is excessively high,” they said in a filing.

PDVSA is relying on sanctions to ward off responsibility for posting the proposed bond, but a federal appeals court on Wednesday barred the state-owned oil company from claiming sanctions prevent it from paying what it owes on $348 million in defaulted debt.

Larry Hamermesh, a retired University of Pennsylvania professor who specializes in Delaware corporate law issues, said he thought the request was too high and said the Chancery Court judge was likely to set a more appropriate figure.

The bond must be “sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate,” Hamermesh said. “ As I see it, it’s clearly not the entire value of the company.”

The legal battles over the fallout from Chavez’s move to wrest control of foreign-owned mining, oil and agricultural assets as part of his so-called Bolivarian socialist revolution stretch back at least seven years.

First in Line 

Crystallex International Corp., a Canadian mining firm whose rights to the Las Cristinas gold field were seized by Chavez, is first in line to receive a hefty slice of the auction’s funds. A World Bank arbitration panel in 2016 found Venezuela owed Crystallex $1.4 billion. Venezuela has paid some of it, but Crystallex is still seeking to recover about $1 billion.

It was Crystallex that first targeted Citgo, and US Circuit Judge Leonard Stark in 2021 ruled that the refiner should be sold to pay the arbitration award. Stark has appointed a special master to oversee the auction, with marketing materials to potential buyers set to go out on Oct. 23 and a January 21, 2024 deadline for formal bids. 

No firm has yet publicly expressed interest in participating in the Citgo auction. Due to the sanctions, the US Treasury Department will have to approve any sale. 

Oil industry analysts have pegged Citgo’s value at about $14 billion. Creditors with around $4 billion have so far asked to participate in the auction, but firms are still lining up to register their claims. 

Other foreign firms shown the door in Venezuela include Siemens AG, ConocoPhillips and Exxon Mobil Corp. A pair of Exxon’s oil projects were expropriated in 2007, and the company is now seeking to have $984 million in claims recognized.

The case is Crystallex International Corp. v. Bolivarian Republic of Venezuela, 17-mc-00151, U.S. District Court, District of Delaware (Wilmington).