Fighting shale oil: Venezuela proposes oil blending

The fight amongst crude oil producers for market share has taken a new dimension. Venezuela has initiated talks on a novel plan to blend the country’s heavy crude with light oil from other OPEC allies, seeking to create a new variety that can compete against swelling US and Canadian supplies.

According to Eulogio del Pino, head of Venezuela state oil company PDVSA, the proposal, which would expand on a pilot scheme involving Algerian oil, envisions supplying refineries built for medium-grade crudes rather than the light oil that has become abundant as a result of the North American shale boom.

PDVSA’s new leadership is eyeing creative ways to retain its US market share at a time of intensifying competition, and to ride out a deep slump in global oil prices that has worsened a recession in Venezuela.

The plan, if agreed, could help Venezuela get more value from its heavy grades, which are under pressure from the rapid rise in shipments of Canadian crude to refineries on the US Gulf Coast, while giving a similar advantage to OPEC members whose lighter oil has been pushed aside by US shale.

Algeria, Angola as potential players

Algeria and Angola are Venezuela’s potential partners for the blending deal given their light blends. Their combined exports to the United States have fallen from some 1 million barrels per day (bpd) in 2010 to under 150,000 bpd in January, US data show.

“It is a perfect complement of partners,” Del Pino said.

The proposal’s success may hinge on whether freight rates would make it profitable to ship African crude to Venezuela for blending and then on to the markets. If not, the OPEC nations might prefer to simply sell their oil elsewhere.

Venezuela last year imported Algerian Sahara crude blend to dilute its ultra-heavy Orinoco Belt oil during the maintenance of a heavy-crude upgrader, using it as a substitute for more expensive naphtha that it has historically used.

Pure crude blend preferred

Blending together different varieties of oil from different countries to create a consistent new grade is unusual but not unprecedented. Many refiners prefer a “pure” crude that comes from the same field each time; it can be difficult to maintain consistent chemical properties with blended grades.

At the moment, however, there is growing interest in medium blends that are easier to refine than thick heavy crudes but cheaper than lights, as US refiners near the limits of abundant light crude they can easily consume.

Most of the blends went to Citgo, Venezuela US refining subsidiary. Citgo buys nearly 30 percent of the Venezuelan oil that is exported to the United States, according to US data. But overall US-bound sales have fallen 38 percent since 2009.

Other US refineries may be less interested in such blends. Some are already expressing frustration at increasing the amount of shale oil blended with Canadian crude because it results in feedstock with unreliable or undesirable characteristics.

The initiative also offers a new perspective on Venezuela’s engagement within OPEC. After failing to persuade the cartel to cut output last November, they toned down public efforts to cajole powerful Gulf producers into shoring up prices.

Venezuela’s output figures have often conflicted with international agencies, which estimate lower output due to methodological differences about how to count extra-heavy crude. It is currently exporting between 2.4-2.5 million barrels per day (mbpd) from national crude production of around 2.85 million.

“We are producing right now 2.85 mbpd. We have increased in the last four months 40,000 barrels per day. We plan to increase at the end of this year roughly 100,000 or 120,000 barrels per day, most from the Belt,” Del Pino said.

Total investment in that region, recently renamed the Hugo Chavez Belt in honor of Venezuela’s late president and where PDVSA has multiple joint ventures with foreign companies, should reach $15 billion this year, he added.

PDVSA has formal ambitious targets to double national production to 6 million by 2019, with 4 million of that projected to come from the Orinoco Belt – but few industry experts or foreign investors expect those goals to be met.

Venezuela has the world’s largest crude reserves, nearly 300 billion barrels, and is South America’s biggest producer.

FRANK UZUEGBUNAM