CITGO's Market Value Grows Seven-Fold Over 16 Years
Sep 24, 2002
In September, the U.S.-based refining, marketing and distribution firm will be marking the 16th anniversary of the initial PDVSA deal with much to celebrate, according to CITGO President and CEO Oswaldo Contreras.
""Looking back and seeing how far we have come certainly gives us reasons to celebrate. This is a story that is worth telling and simply by doing that, we will be acknowledging the contribution of all the people who have made such a major achievement a reality through the years,"" Contreras said.
""It is precisely thanks to a combination of strong support from our stockholder, guidance from our Board of Directors, plus teamwork by our employees and business partners, who have lived up to our slogan, 'We are the energy,' that CITGO is in the position it enjoys today,"" he added.
More than a mere coincidence
Back in 1986, international oil prices had collapsed, and in response, PDVSA was trying to secure market access for its crude and products. It was evaluating independent refiners in the United States with the capability to process heavy sour crude.
And coincidentally at this time, CITGO was looking for a reliable crude oil supplier. With no secure supply of feedstock and at the mercy of the spot market, the company was posting losses in the tens of millions of dollars.
To overcome this problem, CITGO approached several suppliers, but focused on one - PDVSA - with a concept called ""net back pricing."" Rather than one-year supply contracts, CITGO proposed a 20-year pact with prices paid for crude tied to market prices of the finished products.
The ensuing discussions resulted in much more than a long-term supply contract. In September 1986, PDVSA acquired a 50 percent stake in CITGO, and in January 1990, it bought the remaining interest. With this, CITGO quickly became one of the fastest growing oil companies in the United States.
Since 1986, CITGO not only has greatly expanded its assets but has sustained an average growth rate in refined product sales of nine percent per year, with volumes rising from 149 million barrels in 1986 to 588 million barrels in 2001.
The company's Vice President of Corporate Planning and Economics, Bob Funk, discussing these figures, said ""this is remarkable in terms of value growth over time. Wise investors invest for the long term, and our case exemplifies the benefits that can be reaped when the right policies are consistently pursued.""
Today, CITGO sells 13.6 billion gallons of gasoline annually through a network of 13,397 branded retail outlets. Even after the megamergers of petroleum companies, CITGO is ranked as the third top branded gasoline marketer in the United States, and the largest east of the Rocky Mountains, with a market share of 10.12 percent - CITGO's gasoline and lubricants reach the end consumer through a unique strategy: the company owns no retail outlets and relies on an extensive network of independent marketers. (See graph)
CITGO's strengths are largely the result of the expansion policies pursued following PDVSA's acquisition of the company. It has extensive, state-of-the-art refining facilities with a capacity of 865,000 barrels per day, specially tailored to process Venezuelan heavy crude.
Through its CARCO subsidiary, CITGO is the largest supplier of asphalt on the U.S. East Coast. CARCO provides a secure, value-added outlet for Venezuela's heavy and extra heavy crude oil. Its asphalt sales have nearly quadrupled in 10 years, from 6.5 million barrels in 1991 to 22.5 million barrels in 2001. And CARCO's crude runs have more than doubled in the same period, from 10.3 million barrels in 1991 to 23.8 million barrels in 2001.
CITGO also owns or operates 55 petroleum product storage and distribution terminals, which comprise one of the largest networks in the United States.
Additionally, CITGO's petrochemical production has increased dramatically, from 4,000 barrels per day of polymer grade propylene back in 1986, to 56,000 barrels per day of various petrochemical products in 2001, a 14-fold increase.
Meanwhile, lubricants revenues have more than doubled since 1986, rising from $248 million to $536 million last year.
""It was precisely a wealth of complementary interests and strengths that brought PDVSA and CITGO together in the first place and this has spurred growth over the years,"" said Funk.
On the one hand, CITGO brings to the table a secure, value-added placement for Venezuelan heavy crude, ensuring a space in the international downstream value chain.
On the other hand, PDVSA's 77.8 billion barrels of proven crude oil reserves, the largest outside the Middle East, have significantly strengthened CITGO's position as a reliable supplier and marketer of energy products in the United States.
And as part of an international energy corporation such as PDVSA, with business interests in different parts of the world, CITGO has greatly enhanced its scope. A CITGO affiliate, CITGO International Latin America (CILA), is leading current efforts to expand the presence of the PDV and CITGO brands in Latin American and Caribbean markets.
CITGO's value to PDVSA
A study of PDVSA's international assets led by Carlos Jordá, President of PDV America, and completed in 2000, graphically illustrates CITGO's value to PDVSA. The study found that CITGO compares favorably to its competition in several areas, including operating efficiency and financial return.
Discussing the study's findings, Jordá said “CITGO's most important strategic role relates to PDVSA's need to find a home for Venezuela's heavy crude. Heavy crude oil comprises about 71 percent of Venezuela's total proven crude oil reserves, and in PDVSA we have long recognized the need to create secure markets for that heavy crude.
""To help secure an outlet for this heavy crude, PDVSA has over the past 20 years built an extensive global refining system, growing its total capacity to about 1.5 million barrels a day, while increasing its heavy crude capacity to nearly a million barrels a day.
""This system is the largest of all national oil companies and one comparable to majors such as Exxon/Mobil and Royal Dutch Shell. CITGO's refining network, including the joint interest share of Lyondell-CITGO, represents more than 50 percent of PDVSA's international refining capacity and provides a home for 21 percent of PDVSA's crude oil exports.""
In addition to the strategic value of its assets, business knowledge and marketing expertise, CITGO has a long standing presence in the United States.
CITGO was officially born in the spring of 1983 with its incorporation in the State of Delaware, but the company traces its heritage back to the early 1900s and a pioneer oilman named Henry L. Doherty.
In 1910, Doherty created his own organization - Cities Service Company - to supply gas and electricity to small public utilities.
As the years passed, the company grew into one of the leading suppliers of energy to U.S. metropolitan areas, later focusing on the petroleum business exclusively.
In 1942, Cities Service started construction of a 50,000 barrels per day oil refinery in Lake Charles, Louisiana, to support U.S. efforts in World War II. At the time, the United States was at war in Europe, Northern Africa and the Pacific, without sufficient fuel for its bombers, fighters, and tanks.
The years that followed the end of the war saw Cities Service grow into a fully diversified oil and gas company with operations around the world.
In the mid 1960s, the Cities Service marketing personnel decided that the company's gasoline and lubricants products needed a more up-to-date image and snappier name.
To solve the problem, the top industrial design firm in the United States, Lippincott & Margulies, used a computer to research more than 80,000 name possibilities. In the end, one emerged as a clear winner - CITGO.
The letters ""CIT"" were derived from the first syllable of the Cities Service name. ""GO"" implies the company's power, energy and progressive nature.
In 1982 Cities Service was purchased by Occidental Petroleum, which absorbed the exploration and production part of the business.
The following year, the refining and marketing arm was reorganized into a stand-alone business called CITGO Petroleum Corporation and it was sold by Occidental to The Southland Corporation - a rapidly expanding operator of the nationwide chain of 7-Eleven convenience stores. And it was from Southland that PDVSA would eventually acquire full ownership of CITGO.
After the 1986 deal involving CITGO, PDVSA continued to acquire assets in the United States which would eventually become a part of CITGO, significantly expanding the company's capacity to process Venezuelan heavy crude.
The main highlights include:
1986: PDVSA buys 50 percent of CITGO, whose assets at the time included a refinery in Lake Charles, Louisiana.
1987: PDVSA buys 50 percent of the Champlin Refinery in Corpus Christi, Texas.
1987: PDVSA forms a joint venture with Unocal - Uno-Ven - involving the Lemont Refinery, outside Chicago, Illinois.
1990: PDVSA buys remaining 50 percent of CITGO and Champlin Corpus Christi, and combines the two.
1990-1993: CITGO acquires two asphalt refineries in Paulsboro, New Jersey and Savannah, Georgia.
1993: LYONDELL-CITGO Refining joint venture is formed in Houston, Texas. · 1997: LYONDELL-CITGO Refining heavy crude expansion is completed.
1997: PDVSA buys second half of Uno-Ven (Lemont Refinery); forms PDV Midwest Refining (PDVMR).
2002: PDVMR is integrated into CITGO.
Looking to the future
U.S. demand for refined products is expected to increase by some five million barrels per day over the next 20 years, and CITGO and PDVSA, thanks to the growth and consolidation efforts pursued over the past 16 years, are particularly well positioned to cope with this challenge and to continue to grow into the future.
Under the leadership of Oswaldo Contreras, who has been at CITGO since October 2000, the company's two key goals have been defined as strengthening U.S. Refining and Marketing Operations and Developing the Latin American Retail Market.
""CITGO's efforts to achieve our two key goals continue every day, and when assessing our potential for future growth, it is very reassuring to look back and see how much progress we've made since 1986.
""Furthermore, our company is very well positioned to face all future challenges thanks to our true strength, the company's heart and soul, our people, who work day in and day out to demonstrate why in CITGO 'We are the energy,'"" Contreras concluded."