HOUSTON (Reuters) -A U.S. federal judge trying to move ahead with an auction of shares in the parent of Venezuela-owned U.S. refiner Citgo Petroleum is dealing with a fresh dispute between creditors after a lowball starting bid was recommended in a reboot of the sale.

The complex auction meant to repay 18 creditors for debt defaults and expropriations by Venezuela and state oil company PDVSA was relaunched in January after a year-long bidding process ended in shambles amid arguments over Citgo's worth and parallel legal cases.

Lawyers representing Venezuela have also objected to the method of deciding the fate of the country's most-prized foreign asset, while claims of some $21 billion are higher than expected proceeds.

The court decided this time to set a minimum bid for shares in PDV Holding, a U.S. subsidiary of PDVSA and the parent of Houston-based Citgo, following the creditors' rejection of a higher winning offer of about $7.3 billion last year by an affiliate of hedge fund Elliott Investment Management due to conditions included.

A court officer overseeing the auction last week recommended a $3.7 billion bid by Contrarian Funds' affiliate Red Tree Investment as a "stalking horse" bid or a minimum offer to Delaware judge Leonard Stark.

A stalking horse bid, which could secure a higher value for the shares, had not been used in previous rounds.

"The base bid is lower than expected, reflecting the zigzag of this process and political risks associated to dealing with Citgo," said Jose Ignacio Hernandez from consultancy Aurora Macro Strategies.

However, the group that submitted the highest bid, about $7 billion, immediately protested the court officer's choice, making an emergency request for relief to have access to a sealed pact to pay holders of a Venezuelan bond.

That consortium includes miners Gold Reserve ( GDRZF ) and Rusoro and units of conglomerate Koch, all of which are creditors in the auction.

The request to have the agreement unsealed was granted by the judge on Wednesday, according to court documents. A redacted version of the pact was released on Thursday, and a hearing previously set up for Thursday to listen to the creditors' arguments was canceled.

Objections to Red Tree's bid will be received through April 4 before the judge makes a decision on the recommended offer.

Two other consortia including creditors and companies such as trading house Vitol also submitted bids, according to court filings.

CREDITORS' SWIRL

The 18 creditors include holders of defaulted bonds and companies whose assets were expropriated or contracts broken in Venezuela more than a decade ago during an expropriation wave by late President Hugo Chavez. The government of his successor, President Nicolas Maduro, has called the auction "the theft of the century."

The case overseen by Stark was first introduced by Canadian gold miner Crystallex in 2017 after winning an arbitration case, allowing other creditors in similar situations to join.

Each creditor is taking a different road to secure payment, with some companies introducing parallel lawsuits pursuing the same assets and others crafting financial moves to maximize proceeds, which has turned the auction into a creditors' game.

ConocoPhillips ( COP ), which holds the largest claims for almost $12 billion, last year filed a court motion to preserve the U.S. oil producer's almost top priority among the creditors and moved to seize payments to Venezuela from an offshore natural gas in neighboring Trinidad.

Creditors are collectively seeking up to $21.3 billion, but Citgo was valued at up to $13 billion by experts. Bids have been even lower mainly because of the risks that competing lawsuits could prevent proceeds from being distributed.

Citgo, the U.S. seventh-largest refiner, also saw profit plummet last year by nearly $2 billion to $305 million.

BONDHOLDER ISSUES

The Red Tree $3.7 billion bid was selected because it includes a payment provision to holders of a bond issued by Citgo's ultimate parent, PDVSA, according to a court filing, which would remove a key obstacle from the auction's way.

The holders can file injunctions preventing the proceeds to be paid if their case, discussed in a New York court, is resolved.

But some creditors want to make sure that Red Tree's agreement with the bondholders constitutes a firm commitment. A decision on how to proceed with the bond's default requires holders representing no less than 75% of the debt.

"The failure to make public critical components of Red Tree's bid is a clear violation of the court's December 31, 2024 order," lawyers of Gold Reserve ( GDRZF ) said in a filing last week.

Red Tree's bid includes $3.24 billion in cash and $458 million in non-cash consideration. The group would also issue new convertible notes to some creditors junior in the priority list for a potential $1.5 billion value. 

Other bidders have unsuccessfully tried to reach a pact with holders of the PDVSA 2020 bond, which is collateralized with Citgo equity. The agreement, which is expected to require some $2.5 billion in payments, is seen as pivotal to get access to Citgo parent PDV Holding and its assets in the long run.