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.
|Juan Carlos Boué|
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."