Venezuelan oil production has been on a precipitous decline since mid-2017. In December 2018, it reached a new low of 1.25 MMb/d. While the rate of decline in production has begun to stabilize in Venezuela, the threat of sanctions could further hamper heavy crude exports. The US imported just under 500 Mb/d of Venezuelan crude from January to October 2018. Correspondingly, US heavy crude imports from Venezuela account for 40% of Venezuelan oil production. The reliance of Venezuela on the US for exports is clear but how reliant is the US on Venezuela for crude supply?
The two largest importing states, Louisiana and Texas, account for 85% of total Venezuelan heavy crude imports into the US. Additionally, the two states account for 50% of total US crude coking capacity. Refinery coking capacity is critical to the refining process to upgrade heavy crude into more valuable refined products like gasoline and diesel. However, like many processes in a refinery, it is expensive and inefficient to bypass the coking process by switching to source a lighter crude rather than heavy and can lead to other process constraints at the refinery reducing refining capacity.
Since 2005, heavy crude imports into the US have declined slightly with the growth in US onshore production, but have remained mostly stable in total. However, Texas refiners substituted Canadian crude for both Mexican and Venezuelan heavy crude imports. The same, however, can’t be said for Louisiana. Canadian crude production connects to Texas refineries via three large pipelines (Seaway, Keystone, and Marketlink). However, Louisiana refiners have not seen significant infrastructure investment to connect regional refineries to growing sources of onshore US and Canadian oil supply. Therefore, it is unsurprising that the chart below shows that Louisiana imports of heavy Venezuelan crude remain fairly stable. Only in the second half of 2018 did refiners start to dramatically increase imports of heavy Canadian crude.
The switch to Canadian crude has been driven by the lack of pipelines, not new pipelines. Western Canadian Select (WCS) differentials averaged $36/bbl below Brent compared to just $7.31/bbl for Venezuelan crude. For refiners able to procure Canadian crude, the widespread result is significant cost savings compared to Venezuelan supply. Currently, the 375 Mb/d Zydeco pipeline is the only large pipeline that fully connects Louisiana to inland US and Canadian supply. While Energy Transfer has partially completed its 480 Mb/d Bayou Bridge pipeline, regulatory delays continue to plague the project’s final stages of completion. Even upon completion, Bayou Bridge is expected to move lighter crudes, not heavy. Therefore, Louisiana refiners will continue to rely on Canadian rail volumes or new projects to source deeply discounted Canadian heavy supply.
If the US implements sanctions on Venezuelan crude this could impact Louisiana Gulf Coast refiners’ ability to source heavy crude. Canada is desperately working towards increasing takeaway capacity, but the next project expected to be completed is the proposed Enbridge Line 3 project which would not increase deliveries to Louisiana, only the Midcon. The Canadian government has ordered roughly 120 Mb/d of new rail car capacity. The new capacity should enter service by year-end and could increase deliveries to Louisiana. However, this is likely not in time to help Louisiana refiners in 2019 should sanctions materialize.
Finally, production curtailments in the Middle East and flat to declining production in other alternative supply sources may drive a shift in trade flows. This could necessitate a change in OPEC curtailment strategies to accommodate US heavy demand and a potential supply shortage. For more on BTU Analytics’ view on oil markets request a sample of the Oil Market Outlook report.