US refiners weigh loss of Venezuela heavy

OREANDA-NEWS. June 27, 2016. Falling Venezuelan exports could upend heavy crude flows and lift prices along the US Gulf coast, where alternative supplies would face logistical challenges in filling any major gaps.

Faltering supplies of food and other necessities have sparked violent protests and looting in the South American nation. Key oilfield service companies have pulled out of the cash-strapped country as production from state-owned PdV has waned. President Nicolas Maduro on 23 June pressed PdV in a televised address to increase production, but the company lacks the funds for such a move and warns crude output could fall by up to 300,000 b/d this year.

Venezuela, a founding member of Opec, told the cartel that crude production in May dropped to 2.37mn b/d, down by 145,000 b/d from the previous month. Argus estimates production at 2.1mn b/d.

A growing portion of that production has moved to Asia over the past five years as Venezuela satisfies financial commitments with China. Europe buys about 100,000 b/d. But Venezuelan crude remains king of heavy deliveries into the US Gulf coast, accounting for 37pc of all heavy crude imports last year to the complex refining region, or 763,326 b/d. The feedstock also remains a floor for heavy crude prices on the US Gulf coast, trading at a \\$10/bl to \\$12/bl discount to Brent. The loss of Venezuelan heavy crude could more broadly raise prices for the heavy feedstock that inspired billions of dollars of investment over the past decade at US Gulf coast refineries.

US refiners declined to comment on how they accounted for worsening conditions in Venezuela this year. Some, such as Houston refiner LyondellBasell, began shifting to more stable supplies years ago. Average heavy Venezuelan exports to the US have already fallen by almost 200,000 b/d over the past five years. Even PdV's own US refining subsidiary, Citgo, filled roughly two thirds of its US Gulf coast refining capacity with other crudes last year.

Exports from Canada, the largest exporter of crude to the US, were more than double the volume of Venezuela's exports during a seasonal peak in September 2015.Yet just 15pc of those volumes reached the US Gulf coast last year, and Canadian producers have largely reached their near-term capacity to supply the US Gulf coast. New pipeline space into the US from Canada has proven politically difficult to secure, and US Gulf coast shippers can expect to pay roughly three times the pipeline transportation cost to retrieve Canadian heavy by rail, based on Argus assessments. May wildfires that slashed deliveries by up to 85pc from one supplier demonstrated that the Canadian supply has its own vulnerabilities.

Those constraints could give waterborne rivals an edge in reaching US Gulf coast crude units. Exports of the heavy Mexican crude Maya to the US have crumbled by roughly half over the past five years to less than 400,000 b/d in late 2015 and early 2016. Asian and European refiners have enticed cargoes, but falling production from the major Cantarell offshore field and Canadian competition have also taken their toll. Colombia, which is vulnerable to a spillover of Venezuela's crisis in spite of advancing peace talks with the main rebel group Farc, ships roughly 200,000 b/d of heavy crude to the US. And Brazil, facing its own political turmoil, has not averaged more than 150,000 b/d into the US Gulf coast since 2011.

Iran, which already elbowed out Venezuelan exports to India as it works to grow market share, remains off limits to US refiners. Term requirements for Saudi Arab heavy would limit the number of interested US customers. But a Venezuelan decline could create opportunities for Iraq's Basrah heavy production, which has already entered the US Gulf coast market. US interest, reaching 180,000 b/d in March and April, already surprised Iraq's state-owned oil marketer, Somo.