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For the past four years, the United States protected oil refiner Citgo Petroleum from creditors seeking to seize Venezuela's foreign crown jewel for billions of dollars in claims. But on Monday, a U.S. judge will kick off an auction expected to place the Houston-based company in the hands of rivals or investors.

The auction could start a new chapter for the 113-year-old company, which has been owned by Venezuela for almost 40 years. An unknown is whether Biden administration's decision last week to ease energy sanctions on Venezuela could allow the country to repay creditors and end the lawsuit.

A senior U.S. State Department official in Washington last week said in a briefing the sanctions easing should not affect the auction. The U.S. separately extended Citgo's protection from creditors until January.

Reuters has tracked the court case for more than a year and has spoken with nearly two dozen people including employees, investors, board members, attorneys, U.S. officials, rivals and creditors involved with the company. The story they tell is one of miscalculations and a federal judge determined to make Venezuela pay its debts.

Citgo likely will end up next year in the hands of one or more of the largest refiners operating in the U.S., potentially leaving Venezuela with nothing, according to the people most closely involved.

Washington and Venezuela's political opposition wanted Citgo to anchor the country's economic future under a democratically elected government. But both have failed to break Venezuelan President Nicolas Maduro's grip on power since a disputed 2018 re-election.

Now, the forced auction, which involves a parent whose only asset is the refining firm, offers potential for raising some $13 billion to pay a small number of a long list of Venezuela-linked creditors, according to official estimates. Few companies are expected to be able to bid for the entire business: three refineries, six pipelines, and 4,200 independent gasoline retailers.

The sale could become the biggest court auction ever held. Bidders are expected to include Marathon Petroleum (MPC.N), Saudi-owned Motiva Enterprises, Valero Energy (VLO.N) and Koch Industries. Infrastructure investors might also place bids, according to people close to the matter

Motiva, Valero and Citgo's ultimate parent, Venezuela's state oil company PDVSA, did not reply to requests for comment. Marathon, Citgo and the U.S. Treasury Department declined to comment.

The price tag and anti-trust concerns will limit the pool of bidders for the entire company, said Matthew Blair, managing director for refining research at financial firm Tudor, Pickering, Holt & Co.

"We expect it will have to be broken up," he said. In addition, "the assets come with some wholesale/retail gasoline exposure, which could make it tough for foreign buyers," Blair said.

Venezuela's chance of retaining some stake in Citgo is very slim, according to experts. When offered for sale in 2014, the company was valued at nearly $12 billion, and its sharply improved profitability since then likely will draw higher bids. But the nation's foreign debt surpasses $90 billion.

"Citgo will be lost. It is now just a matter of how long the auction will take. We won't be able to even find the leftovers," said Venezuela's former attorney general Jose Ignacio Hernandez.

DETERMINED JUDGE

U.S. District Court Judge Leonard Stark in Delaware in 2019 found PDVSA was the alter ego of Venezuela, a rare court ruling that opened the door for Crystallex International to pursue shares in one of Citgo's parents, PDV Holding, to recoup losses from Venezuela's expropriation of its assets.

Venezuela had believed it was shielded from creditors' advances because U.S. courts generally treat corporations as separate from their owners. Since Citgo severed ties with PDVSA in 2019, the U.S. government has recognized a series of supervisory boards appointed by Venezuela's opposition-led National Assembly and its former head Juan Guaido.

"It was helpful to have the ad-hoc board," said Natalie Shkolnik, a litigation partner at law firm Wilk Auslander who has written about the finding. "It just wasn't enough to avoid the alter ego finding."

Venezuelan President Nicolas Maduro fought the boards' appointments, and recently said Citgo had been "kidnapped" by the U.S.

Stark, 54, methodically laid the groundwork for Monday's auction by hiring an investment bank and naming a court official to deal with U.S. agencies that protect Citgo.

His 2018 alter ego ruling for the first time tied PDV Holding to Venezuela's debts, a ruling Venezuela's lawyers continue to fight before the U.S. Supreme Court. The appeal is pending.

Stark declined to hand off the case to another judge after being promoted in 2022 to an appeals court. He this year hired investment banker Evercore Group to put financial data together and market the company.

Evercore is soliciting a stalking horse bid, or an initial bid, that could be disclosed this week. Such a bid could include firms with large arbitration awards, including ConocoPhillips (COP.N) and Exxon Mobil (XOM.N).

Conoco said it is "pursuing all available legal avenues" to collect its three awards. Exxon declined to comment.

Stark early on recognized the case had broader reach than Citgo. He sent a court officer to the U.S. Treasury Department's Office of Foreign Assets Control, which has long blocked claims against Citgo, and received pre-clearance for the auction.

Stark did not reply to a request submitted to the court to be interviewed. Bidders are expected to submit confidential offers to Evercore.

"This auction is not an equitable or fair process. Only the first ones to arrive would be paid through the destruction of an asset," said Horacio Medina, who leads one of the boards overseeing Citgo. "The game is not over," he told Reuters, saying talks with creditors to reduce the auction's scope are ongoing.

PROFITABLE BUSINESS, DASHED HOPES

Carlos Jorda, Citgo's well-respected CEO who was appointed in 2019 by Venezuela's congress, tackled years of poor maintenance that had been ignored by its Caracas-based parent, cut debt and improved finances.

Its three refineries ran at an average 98% of capacity in the last four quarters. Over that same period, the company's cumulative net income totaled $4.92 billion, compared to his first year, when it earned $246 million.

Jorda declined through a spokesperson to be interviewed.

But if Citgo and its boards fail to reach payment agreements before the winner bidders are declared next year, Venezuela, which bought Citgo to pursue an international strategy, will wind up empty-handed.

Citgo's 807,000 barrel per day refining network, which is geared toward processing Venezuela's heavy crude, is as critical today as when PDVSA acquired the company.

"Citgo will be strategic for Venezuela in the next 20-25 years, not only as a refining company, but with an expanded role," director Medina said. The company one day might compete with PDVSA by operating as a vertically integrated oil company with production assets in Venezuela.

Today, that appears a slim hope.

"Citgo's loss will cause a big moral damage to Venezuelans and will not bring benefits to many, except to a handful of lucky creditors that might squeeze into the auction," former attorney general Hernandez said.

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