If the approved, but delayed, Keystone XL pipeline is not yet managing to deliver Canadian oilsands crude to refineries in the southern US, maybe the latest Venezuelan crisis will succeed where it has failed. Reports in mid August claimed that a US refiner had been making enquiries about substituting its regular imported fuel from Venezuela for Canadian crude. Citgo Petroleum Corp. is the largest US importer of Venezuelan oil but, in the face of a dramatic drop in imports from the South American nation, it may need to look elsewhere for crude: falling output in Venezuela saw imports to the US hit a 14 year low in July.
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Venezuela, which boasts the world’s largest crude reserves, is now sending more of its heavy oil to China and India, in an effort to repay loans. Additionally, the country has been experiencing national unrest following a contested election in July, in which President Nicolas Maduro asked the country to elect a ‘constituent assembly’ that would assume sweeping powers, including the capacity to rewrite the constitution. Maduro says the assembly will bring peace to the country after months of protests and political stalemate between the government and the opposition-controlled National Assembly. Since the formation of the assembly, Venezuela’s Chief Prosecutor Luisa Ortega, a critic of Maduro, has been dismissed and ordered to stand trial.
Maduro was elected President in 2013, following the death of fellow United Socialist Party of Venezuela (USPV) President Hugo Chavez. Oil accounts for approximately 95% of Venezuela’s export revenues and Chavez’s regime was praised for using oil revenue to improve social conditions. Maduro’s government has been hampered by falling oil prices: the associated drop in oil revenue has meant cutting back on vital social programmes and this has generated unrest.
Venezuela is an OPEC member and has seen output fall by 11% this year, also due in part to underinvestment in ageing oilfields and infrastructure problems.
The country now faces the prospect of a US blockade, as Maduro’s apparent move away from the pillars of democracy draws criticism from other nations, particularly the US. Sanctions already exist on current and former Venezuelan government officials accused by the US of supporting Maduro’s creation of an assembly. The issue of further action against Venezuela has ignited fierce lobbying in Washington D.C., with many warning that imposing nationwide sanctions on Venezuela would do more harm than good. Six Republican congressmen recently wrote a letter to President Trump warning that any unilateral action against the country would stand to jeopardise 525 000 refining related jobs along the Gulf of Mexico coast – where Venezuelan crude represents 10% of US imports. Nine companies currently process Venezuelan crude, among them Citgo, Valero, Phillips 66 and Chevron, in more than 20 refineries.
Of course, Citgo could use oilsands crude in place of the heavy oil it is lacking from Venezuela, as both crudes have similar qualities (heavy and high in sulfur). Citgo has refineries in Lake Charles (Louisiana) and Corpus Christi (Texas) and has not imported Canadian crude for two years.
Heavy crude is in demand: not only because of sinking Latin America output, but because of recent OPEC manoeuvrings. OPEC is attempting to rebalance global markets by cutting sour crude output and keeping light sweet crude flowing, as the US shale industry pumps at record levels. This means that heavy oils find themselves attractive to markets that would have otherwise plumped for medium sours.
For Canada, this could be a bright spot in the market – although of course, lack of pipeline capacity would still considerably hamper this plan. If Citgo and others go ahead with the substitute, it is likely that some of the oilsands crude would be moved by rail: another compelling argument for KXL.