US refiners hunt for heavy alternatives: Update

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US refiners were publicly confident this week that alternative supplies could fill the sudden gap left by US sanctions against Venezuela's key heavy crude exports as prices rose.

Prices for sour crude to the US rose sharply following the imposition of sanctions blocking transactions with Venezuela's national oil company, PdV. Restrictions land at a time of particularly tight supplies of the very heavy feedstock craved by US Gulf coast complex refineries and of growing inventories of US naphtha often sold to Venezuela for crude blending.

Sanctions increased competition for refinery feedstocks not easily replaced by growing volumes of light, sweet crude production that helped to make the US a net exporter of oil products last year. The heavy, sour crude benchmark Western Canadian Select (WCS) rose in Houston to a $2/bl premium to CMA Nymex WTI following the sanctions — only the seventh traded day to reach such a premium and the third-largest intraday move since assessments began in March 2016. Mars, a lighter crude used as a broader benchmark for sour feedstocks in the US Gulf coast, rose 35¢/bl yesterday to a $5.50/bl premium to WTI at Cushing, Oklahoma.

President Donald Trump's administration downplayed the role of Venezuelan crude in US refining and fuel prices this week.

"I expect, in the short term, very modest impacts on the US refineries," treasury secretary Steven Mnuchin said in a press briefing.

Venezuela has vied with Mexico over the past eight years to be the third-largest total exporter of crude to the US. But Venezuela over the same period dominated US supply of very heavy, sour crude below 20°API and greater than 1pc sulfur.

Venezuela and its joint partners export roughly 1mn b/d globally Merey blend, diluted crude oil (DCO) and other grades. Merey blends to about 16°API, and DCO combines 8°-10°API Orinoco crude and 30pc naphtha.

US refiners have reduced imports of Venezuelan crude over the past two years as quality and delivery reliability suffered. But only a short, disrupted list of alternatives for very heavy crude can reach the US Gulf coast. Canadian heavy sour exports eclipsed Venezuela's share of heavy sour crudes last year. Those remained in limited supply on the US Gulf coast, thanks in part to pipeline constraints from Canada's landlocked Alberta province. The earliest pipeline projects expected to provide some additional capacity will come online at the end of this year.

Alberta's provincial government this month began production curtailments to clear inventories built up by the constraints. Early estimated export volumes have held steady this month as shippers clear tanks. Liam Stone, head of Alberta's office in Washington, DC, said sanctions did not immediately change the curtailment program.

"We have said all along the goal is to maximize Alberta's exports," Stone said today. "The sanctions on Venezuela will be factored in, but it will not change the overall direction."

US Gulf coast interest in heavy, sour Colombian Castilla production increased this month, and small volumes of Brazilian Peregrino and Ecuadoran Napo crude with similar characteristics moved to the US last year. But additional export capacity remained limited and an overall small share of the US heavy crude diet.

And "friends in the Middle East ... happy to make up the supply" Mnuchin cited when discussing the sanctions yesterday have not historically offered a match for the very heavy crude. Arab Heavy, despite its name, has a 27.4°API closer to Mars than Merey.

Citgo, a US subsidiary of PdV, faces immediate challenges replacing Venezuelan crude. It was the top destination for US imports, mostly to its 425,000 b/d refinery in Lake Charles, Louisiana. But other US refiners already completely pushed the Venezuelan crude out of their system well ahead of the sanctions.

US independent refiner Phillips 66, which in 2014 wrested control of a PdV joint venture coker designed to process Venezuelan crude at its 247,000 b/d refinery in Sweeny, Texas, gradually eased that facility to a diet built on Canadian and Mexican heavy crudes. Venezuela's share of Sweeny's heavy crude imports fell from roughly 90pc in 2012 to 34pc in 2017 and nothing at all in 2018. Sporadic imports of Colombian and Ecuadorian crude supplemented the refinery's Canadian and Mexico heavy slate in 2018.

Phillips 66 has declined to comment specifically on its supply strategy, but said yesterday it expected to continue operations despite the sanctions.

"We are confident that by utilizing alternative sources, we will be able to mitigate any disruption in crude supply for our operations," the company said.

Access to Canadian crude helped with that transition. Sweeny and other upper Texas coast refiners saw growing pipeline access to heavy barrels in 2014. But complex refining capacity in Louisiana and Mississippi have lacked similar pipeline access to Canadian barrels, making it more difficult to move away from Venezuelan supply.

Valero since 2016 increased the concentration of its heavy Venezuelan imports at its 215,000 b/d refinery in St Charles, Louisiana. The refinery took smaller imports of Canadian and Colombian heavy crudes in 2014 and 2015, but focused most of its heavy supply back on Venezuelan imports in 2016.

"We plan to comply with the sanctions and will re-optimize our crude supply to minimize any resulting impacts," the refiner said following the sanctions. "Valero will continue to support the administration and will provide officials with relevant information that will help the US refining system to function efficiently and effectively to support the US economy."

Potential global customers could also soon join competition for Venezuelan replacement barrels. Sanctions immediately cut off naphtha needed to blend into DCO, which Venezuela must replace at higher cost. Sanctions also direct US financial institutions to reject transactions with PdV entities outside of the US until 29 March.