(Updates story published on July 3 with procedure details)

By Marianna Parraga

HOUSTON, Sept 15 (Reuters) - A U.S. court on Monday

begins the final sale hearing of an auction of shares in the

parent of Venezuela-owned refiner Citgo Petroleum to pay

creditors, following heavy competition for the seventh largest

U.S. refiner.

A court officer overseeing the auction in August changed

his recommendation of winner to a $5.9 billion

offer

by an affiliate of hedge fund Elliott Investment

Management, following a bidding war. He had previously

recommended a $7.4 billion offer by a unit of Toronto-listed

miner Gold Reserve ( GDRZF ).

The change has triggered objections and intensified a

fight

between creditors and bondholders in pursuit of the same

assets. The court will listen to all parties, witnesses and

experts through Thursday before deciding on the auction's

winner.

The auction stems from an eight-year-old case that Canadian

miner Crystallex initiated in Delaware against Venezuela. The

court found Citgo's parent, PDV Holding, liable for Venezuela's

debts and past expropriations, paving the way for over a dozen

other creditors to pursue compensation of nearly $19 billion.

The bidding round initiated this year is expected to be

completed soon once Judge Leonard Stark approves a winner,

following a string of delays.

Elliott's affiliate Amber Energy and Gold Reserve's ( GDRZF )

subsidiary Dalinar Energy have competed neck and neck in recent

months, improving their bids ahead of the hearing. Commodities

house Vitol, an affiliate of Contrarian Funds and a consortium

led by Black Lion Capital Advisors also competed.

Frontrunner Amber Energy proposes to fully pay nine of

the case's 15 claimants, compared with the 12 claimants that the

Gold Reserve ( GDRZF ) group would compensate.

But Amber also offered to pay $2.1 billion to holders of a

defaulted Venezuelan bond collateralized with Citgo equity to

settle a key claim and remove an obstacle from its route to a

takeover of Citgo.

Gold Reserve ( GDRZF ) and a handful of creditors oppose an

immediate payment to the holders, arguing that a separate New

York case over the bonds' validity has not been resolved and the

payment would deprive some claimants in Delaware of proceeds.

How big a loss could this be for Venezuela?

If Venezuela, which owns 100% of the refiner and its

U.S.-based parent companies, fails to retain some equity, it

would lose its most significant overseas asset. The country,

with foreign debt reaching $150 billion, has already lost other

assets in Europe and Asia to creditors.

Judge Stark has left open a possibility for parties

representing Venezuela to submit an offer. But they would need

to secure backing from politicians in both Caracas and

Washington, a challenge given U.S. sanctions on the OPEC nation

and otherwise strained ties.

If court procedures progress as planned, the earliest

takeover of Citgo would happen in the second quarter next year,

said Horacio Medina, head of a Venezuelan board supervising the

refiner, in a conference on Friday.

Prior to the sanctions, Citgo's 807,000-barrel-per-day

refining network was a primary processor of Venezuela's heavy

sour crudes. Since Citgo in 2019 cut ties with its ultimate

parent, Caracas-based state company PDVSA, Venezuela has

struggled to find new markets for its oil, while the

Houston-based refiner has resorted to other crude suppliers.

Venezuela's opposition, which through its Congress majority

in 2019 appointed the boards that now supervise the refiner, has

worked for years to retain Citgo, including funding legal

defenses and lobbying in Washington. The U.S. Treasury

Department, which has shielded Citgo from creditors in recent

years, must approve the auction's eventual winner.

Opponents of Venezuelan President Nicolas Maduro have said

Citgo could aid the nation's economic recovery if democracy is

restored. Maduro's officials have rejected U.S. sanctions and

called the auction the theft of a sovereign asset.

Can creditors claim post-auction compensation?

Yes. Many creditors including ConocoPhillips ( COP ), which

holds the largest claims of almost $12 billion, and Gold

Reserve ( GDRZF ), have pursued legal action outside of the U.S. to seize

Venezuela-owned assets, from bank accounts to PDVSA-controlled

facilities.

The creditors, who rejected the outcome of a bidding round

last year due to conditions imposed by the winner, Amber Energy,

can submit objections if dissatisfied with its results.

They and other creditors outside Delaware can also continue

parallel cases in other U.S. courts, which so far have not

significantly progressed to enforce claims or prove that PDVSA's

U.S. subsidiaries should be liable for Venezuela's debts, a

necessary step to pursue Citgo's assets.

Accumulating legal costs and uncertain recovery prospects

led three of the 18 creditors originally cleared by the court to

withdraw. Others did not fulfill all court requirements to

participate.

Will all creditors be compensated?

Unlikely. Citgo was valued in up to $13 billion as part of

the Delaware case, but the total value of offers in all bidding

rounds has remained below $11 billion.

The refiner's profit plummeted to $305 million last year

from $2 billion in 2023. Following two consecutive quarters of

loss, Citgo returned to profit in the second quarter.

These factors suggest that a portion of the 15 registered

creditors, collectively claiming $18.9 billion, may not receive

distributions from the auction.