Venezuela's Citgo Turns to Canada for Oil as Crisis Deepens
(Bloomberg) -- Venezuela’s oil-supply woes are so dire that its U.S. refineries are turning to Canada for help.
Citgo Petroleum Corp., the largest U.S. importer of Venezuelan oil and a unit of state-owned Petroleos de Venezuela SA, has started to make quiet inquiries to buy Canadian crude for its refineries in Texas and Louisiana, according to people familiar with the situation. The imports would be used to replace dwindling shipments from Venezuela, where output dropped to a 14-year low in July.
Venezuela, the country with the world’s largest crude reserves, is shipping less to Citgo as it redirects more of its shrinking supply to China and India to repay loans. Canadian crude, equally heavy and high in sulfur as Venezuelan oil, is a natural replacement, said Dinara Millington, vice president of research at the Canadian Energy Research Institute in Calgary.
“Canada would be in the best position because that volume would be more or less guaranteed,” Millington said.
This would be the first time Citgo imports Canadian oil for its Lake Charles, Louisiana, and Corpus Christi, Texas, refineries in more than two years. Although Canada is the largest supplier of oil to the U.S., more than half of that is absorbed by plants in the Midwest. Limited pipeline connections and expensive rail make it hard for Canadian oil to reach buyers along the U.S. Gulf Coast, home to the world’s largest cluster of refineries.
Last week, U.S. imports from Venezuela fell to 507,000 barrels a day, the lowest level in five months, according to data from the U.S. Energy Information Administration. The latest monthly data show that Citgo’s Gulf refineries took 176,000 barrels a day from Venezuela in May, the least since December.
Spokesmen at PDVSA and Citgo didn’t return emails seeking comment.
Citgo’s not the only company looking north. U.S. refiners have also been on the hunt for alternative supplies amid concern that U.S. sanctions, currently aimed at Venezuelan nationals, may expand and target oil imports from the South American country. One Gulf refiner has started to test fuel oil from Russia and the Middle East and diluted bitumen from Canada as potential replacements, according to a person familiar with the matter.
Citgo is starting to feel the effects of falling oil output in Venezuela, exacerbated by 20 years of cash-for-oil deals signed with China, Japan, India and, most recently, Russia. Rosneft PJSC, which signed two long-term oil and oil product supply agreements, said it has made total prepayments for future oil supplies of about $6 billion. That leaves less oil to be processed by the refineries controlled by PDVSA.
The Venezuelan crisis isn’t only affecting the Citgo refineries. Venezuelan refineries are operating at less than half of their capacity. In Curacao, PDVSA’s Isla refinery has been importing light U.S. oil since last year to make up for lower domestic production of light grades.
While Venezuela hurts, Canadian producers seem to be finally out to catch a break. A reduction in Venezuelan imports may bolster the case for the Keystone XL pipeline, which would carry western Canadian crude directly to the Gulf of Mexico, Millington said.
Heavy crudes from Canada, Mexico and elsewhere have increased in value after OPEC and other producers capped output, reducing primarily supplies of less-expensive heavy crude. Western Canadian Select was $10.05 a barrel below benchmark U.S. West Texas Intermediate on Thursday, from a $16.15 discount at the end of 2016, according to data compiled by Bloomberg.
Higher prices for Canadian heavy crude would come at a welcome time for the industry, said Trevor McLeod, director of the Natural Resources Centre at the Canada West Foundation.
“The energy sector in Alberta is struggling a bit right now,” McLeod said in an interview. “They’d absolutely welcome a price increase.”
With assistance from Sheela Tobben, Kevin Orland, Stephen Bierman and Dina Khrennikova. To contact the reporters on this story: Lucia Kassai in Houston at firstname.lastname@example.org; Robert Tuttle in Calgary at email@example.com. To contact the editors responsible for this story: David Marino at firstname.lastname@example.org Margot Habiby.
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