Pipelines are full, which would mean more oil-by-rail to US Gulf Coast refineries
Global heavy crude oil markets are already tight because of OPEC cutbacks and potential sanctions against Venezuela by the United States could make them even tighter, opening new market opportunities for Alberta oil sands producers with refiners in the Gulf Coast region.
The Trump Administration is considering wide-ranging sanctions against Venezuela as Latin America countries protest President Nicolas Maduro’s plan to create a “constituent assembly” that could effectively make him a dictator. Sanctions could include an outright ban on oil imports by the US. But prohibiting any transactions in US currency by state-run oil firm PDVSA would be most crippling because importers would find it very difficult to do business with Venezuela, according to Reuters.
Either option could work to Alberta’s advantage, says Kevin Birn, director of the Oil Sands Dialogue, IHS MarkIt.
“The United States remains one of the largest oil import market in the world and the largest market for heavy oil,” Birn said in response to emailed questions. “Refiners that have made significant investments to consume heavy oil will seek to consume those crudes to maximize their profits—any contraction in Venezuelan supply could catch those facilities out and hinder their operations.”
The US imports between 700,000 b/d and 800,000 b/d of crude oil from Venezuela into the Gulf Coast. Total Gulf Coast imports are around three to 3.2 million b/d.
“This is significant. This crude oil is predominately of similar quality as Canadian heavy oil and competes for refining space in the USGC,” says Birn.
The short answer is that Venezuela sanctions would be positive for Canadian heavy oil grades Western Canada Select and Synthetic Crude Oil, according to Robert Skinner, executive fellow, The School of Public Policy, University of Calgary.
Canadian exports to the Gulf Coast have been increasing because most of the 1.8 million b/d cut from OPEC’s production was heavy crude oil.
“Most recent data from the US Energy Information Agency shows Canadian imports to USGC have breached 400,000 b/d,” according to Birn.
“In the event of an restriction on Venezuelan imports, those heavy refiners will need to secure alternative heavy oil. This may result in stronger demand for Canadian heavy and consequently higher prices (and tighter light-heavy differentials)—benefiting Canadian and other heavy producers.”
Ed Hirs, an economist with the University of Houston, says the Venezuela oil is most likely shipped to the CITGO refinery, which is owned by Venezuela and mortgaged to Russian oil companies.
“The sanctions will stop that oil from coming into the US and likely cause a bit of a headache for Venezuela and CITGO as the supply stream changes. CITGO may have to pay real cash for its new source of supply,” he said in an email.
Hirs thinks it most likely that traders in the physical market will execute swaps, which will just cost Venezuela additional margin, saving the financially trouble country from having to pay cash.
“Of course, the crude from Canada can be a substitute for the Venezuelan crude at CITGO as are the various heavy crudes available from Saudi Arabia and other producers. It will all work down to price,” said Hirs.
Alberta heavy production comes from the oil sands, which has a long lead time and flat production profile – arguably some of the least responsive oil supply on the global market, says Birn.
“Oil sands supply doesn’t increase rapidly, but it doesn’t decline, either. For refiners this is an attractive characteristic, making Canadian supply predictable and stable, a stark contrasts to the current situation in Venezuela.”
Oil sands output is expected to grow by over 200,000 b/d this year because of projects approved before the late 2014 price collapse. If the Gulf Coast emerges as a market for the extra crude, getting product to customers may be a challenge for Canadian companies.
“Pipeline capacity remains constrained and given anticipated supply growth out of Western Canada, more movements of crude-by-rail should be expected. Greater movements of crude-by-rail will likely come at a greater cost, but we are also seeing strong demand for Canadian heavy in the USGC already which has led to remarkably tight differentials,” potentially offsetting higher transport costs, says Birn.
“Further restrictions in heavy crude oil availability in the USGC could help exacerbate this situation – to the benefit of Canadian producers.”
Growing American shale oil won’t be a competitive issue for Alberta producers, according to Birn.
“Although oil sands and tight [shale] oil may compete for capital, they are largely complementary from a market perspective, with the oil sands producing predominately a heavy sour crude, and tight a light sweet crude,” he said.
“Tight oil has had a pronounced impact on US imports of light sweet crude, while US imports of heavy crude have remained largely intact.”
According to Reuters, financial restrictions against Maduro’s government have been “raised repeatedly” in recent White House discussions, a senior American official, who spoke on condition of anonymity, and added that no final decisions have been made.