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Heavy crude oil shift complicates US-Venezuela actions



By Argus

Petroleumworld 01 21 2019

An emboldened Venezuelan opposition and tighter global heavy crude oil supplies have complicated the US' options to respond to President Nicolas Maduro's disputed second term in office.

Refiners confirmed renewed discussions with White House officials this month on potential sanctions disrupting the flow of oil from Venezuela's autocratic government to mostly US Gulf coast facilities. Sanctions have been a regular feature of such discussions for almost two years.

But Venezuela's very heavy, sour oil production feeds some of the US Gulf coast's most complex refineries, providing a base of supply that booming US light crude production cannot easily replace. The latest talks of sanctions come as alternative supplies of heavy crude are harder to come by, as those producers have slashed exports to support prices.

"This basically would ensure that our US Gulf coast refiners that are optimized to run heavy crude will not have the same access to it," American Fuel and Petrochemical Manufacturer vice president of government relations Geoff Moody said of a possible sanctioning of Venezuela crude.

Venezuela accounted for more than 28pc of US Gulf coast heavy crude imports in 2017, according to the most recent full year of Energy Information Administration (EIA) data, the most of any country. Venezuela's US refining subsidiary, Citgo, takes the largest share of exports, followed by US independent refiner Valero, Chevron and PBF.

Mexico supplied more than 27pc of the Gulf coast region's supply in 2017, and Canada the largest exporter to the US, shipping a flood of heavy crude into the midcontinent was just 19pc of the US Gulf coast diet. For the first ten months of 2018 Venezuela fell to 23.8pc, or roughly 488,000 b/d, according to the most recent data available. Mexico took the top spot with 29pc of supply in that period and Canada increased to 23pc of the Gulf coast heavy supply.

But refiner access to heavy crude alternatives to Venezuela's production have fallen sharply over the past two months.

Opec cuts beginning this month have reduced mainly medium and heavy sour global crude supplies by 1.2mn b/d, increasing competition for replacements from Asian and other heavy crude buyers. Venezuela is an Opec member.

And prices for the Canadian heavy benchmark Western Canadian Select (WCS) have risen sharply since December when the Alberta government announced plans to begin capping production to alleviate very high inventories and pipeline constraints out of the province. The glut dropped WCS to a fourth quarter average discount of roughly $33.77/bl to WTI at the crude storage hub in Cushing, Oklahoma. Prices in the month so far have averaged a $9.03/bl discount, compared to a $24.67/bl discount in the same period of 2018. The price was almost flat to WTI after transportation costs, almost erasing a quality discount for the very heavy sour.

The US has taken refiner concerns seriously, Moody said. Sources expected Mexico to have little additional heavy production to send. And solutions to pipeline constraints limiting Canadian supply to the US Gulf coast and global market remain years away.

"There are not any magic wands anyone can waive," one refining source familiar with discussions said.

Maduro's 10 January inauguration to a second term that US officials describe as illegitimate has emboldened domestic opposition to his rule. The opposition-controlled National Assembly, headed by the newly elected Juan Guaido, is planning a national protest on 23 January aimed at compelling Maduro to resign. The outcome of protests may well determine whether Washington imposes sanctions on Venezuela's oil sector to compel the Maduro government to relinquish power.

Vice president Mike Pence and other senior US officials say the National Assembly is the only legitimate government entity in Venezuela and have hailed its decisions since 10 January to consolidate its constitutional authority. But Washington is not yet ready to withdraw formal recognition from the Maduro government and confer it to the National Assembly a step with legal ramifications, among other things, for ownership of Venezuelan assets in the US and control over revenue derived from oil exports.

"If we know that recognizing Guaido will lead to his arrest and whatever else, torture, what is the decision at that point?" says Fernando Cutz, who served as South America director at the White House National Security Council in the first year and a half of the Trump administration. "If we are prepared to take that step, what tangible action are we prepared to take to back that up if and when the legitimate leader of Venezuela in our eyes is beaten and tortured?"

The US already has imposed sanctions on Maduro and other top Venezuelan officials, in additional to financial sanctions restricting the ability of Venezuela and state-owned PdV to raise debt.

But the most effective tool in the US arsenal imposing sanctions on imports of Venezuelan oil to the US or exports of US naphtha and oil to that country is also one that US officials have been unwilling to engage, out of fear of an immediate collapse of the Venezuelan economy that will be blamed on the US.

"The US is currently considering all diplomatic, political, and economic tools in its arsenal in response to the usurpation of power by the illegitimate Maduro regime," the White House said.



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