Louisiana, with a major Citgo refinery in Lake Charles and other refiners' reliance on Venezuelan oil, is “disproportionately exposed” to sanctions imposed Monday by the Trump administration to put pressure on that country's president to cede power to the opposition.
The Trump administration did not directly ban imports of Venezuelan crude oil. Instead, it blocked U.S. companies from entering into financial transactions with the state-owned oil company that's known by its acronym PDVSA. That's for as long as PDVSA remains under the control of President Nicolas Maduro. That means that any payment for Venezuelan crude imports will go to blocked bank accounts, according to Treasury Secretary Steven Mnuchin, to preserve assets for the Venezuelan people.
In response, Maduro's government could seek to redirect its U.S. exports to other countries.
Historically, 40 to 50 percent of Venezuelan crude comes to Louisiana to be refined by companies like Citgo and Valero Energy, said Eric Smith, director of the Tulane Energy Institute. And because some of the state’s refineries are set up to refine the heavy sour crude that comes from the country, Louisiana is “disproportionately exposed.”
Citgo is a Houston-based subsidiary of PDVSA and operates a 425,000-barrel-per-day refinery in Lake Charles, employing 1,800 full-time workers and contractors, according to the company's website and published reports. The refinery is one of the largest in the U.S. and the largest operated by Citgo, which boasts a $597.3 million “total economic impact on Lake Charles.”
David Dismukes, head of the LSU Center for Energy Studies, said if the sanctions don’t stop the flow of crude oil coming to the U.S., and only put proceeds associated with the refining of the oil into frozen bank accounts until the issue is resolved, it likely won’t have a big impact. “But that assumes that Venezuela does not just simply halt the exports to begin with,” he said.
Valero and Citgo did not respond to messages seeking comment Tuesday.
If problems arise in the short-term, the U.S. government could release oil from the U.S. Strategic Petroleum Reserve to alleviate the pressure on U.S. companies, Smith suggested, and in the long-term, more pipelines could be built to pick up the slack. Louisiana refiners could have to spend more to source oil from further away, he said.
The U.S. imports less than 500,000 barrels a day of Venezuelan crude, down from more than 1.2 million barrels a day in 2008, according to the Energy Information Administration. Oil exports to the U.S. have declined sharply in recent years as Venezuela's production plummeted amid an economic collapse.
Still, Venezuela is among the top four suppliers of crude to the United States, though it now only supplies about 6 percent of imports.
Many companies gradually reduced Venezuelan imports over the past two years, though Gulf Coast refineries still depend on Venezuelan crude for about a quarter of their imports, according to data from the EIA.
There's no shortage of oil in the world right now, with global supplies hitting a record last summer, boosted by rising production in the U.S. and several OPEC nations. A report from the American Petroleum Institute last week said that the U.S. has surplus gasoline stockpiles that "could approach burdensome levels" and force gas prices down further.
But supply is tighter for heavy crude oil, which is what the U.S. imports from Venezuela. Production of heavy crude in Mexico has been declining, and although there is a strong supply in Canada, there are challenges to getting that crude to the Gulf Coast refineries. Heavy crude production the Middle East also declined with the most recent round of OPEC output cuts.
John Auers, executive vice president of the refining consultancy Turner, Mason & Co., said Gulf Coast refineries have been switching to lighter or medium grade crude amid the tight supply of heavy crude.
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But the tighter market for heavy crude also means that those companies that are most reliant on Venezuelan crude will have a harder time finding alternatives. Auers said they would likely turn to the Middle East, particularly Iraq. He also said that more supply from Colombia and Mexico could be redirected to the U.S. if Venezuela redirects its own exports to Asian customers.