Venezuela Oil Sales to U.S. at 1985-Low Shows China Cost

Venezuelan oil sales to the U.S. are approaching 28-year lows as the country turns to China amid a shale boom that’s flooding U.S. refineries. Now a Canada-U.S. pipeline threatens to further curb its Gulf of Mexico access.

Venezuelan exports of crude and petroleum products to the U.S. averaged 792,000 barrels a day in the first 11 months of 2013, which would be the lowest annual rate since 1985, according to data published yesterday on the U.S. Energy Information Administration’s website.

State-run Petroleos de Venezuela SA, which oversees the world’s largest oil reserves, is sending hundreds of thousands of barrels a day to China to pay back government loans. At the same time, refiners along the U.S. Gulf Coast are sourcing more domestic supply as a surge in drilling shale rock sends output to the highest in a quarter-century. A proposed pipeline to transport Canadian crude from oil sands in Alberta to U.S. refining centers could further restrict Venezuela’s access to profitable export markets, according to Tissot Associates.

“As more heavy Canadian crude comes to the Gulf Coast, it’s going to displace Seaborne heavy crude barrels from exporters such as Venezuela,” Amrita Sen, chief oil market strategist at Energy Aspects Ltd., said by phone from London.

PDVSA, as the Caracas-based company is called, saw its production decline to 2.45 million barrels a day in December, from a daily average of 2.9 million barrels reported in 2012, a Bloomberg survey showed.

China Loans

The company is receiving market prices for oil shipments to China, said a PDVSA official, who isn’t authorized to speak publicly. The official didn’t give shipping cost comparisons.

“Venezuela is losing out by selling crude to China, which is a market where they are netting back a lower amount of money,” John Auers, a senior vice president at industry consultant Turner Mason & Co., said by phone from Dallas. “They have been doing it in spite of themselves, as they do not want to sell to the U.S.”

China has emerged as a strategic source of financing for Venezuela, lending the OPEC-member more than $40 billion since 2008 in exchange for future oil deliveries. Venezuela is exporting 640,000 barrels a day to China, Rafael Ramirez, oil minister and PDVSA president, told reporters in Caracas Nov. 27. About 310,000 barrels a day are used to pay back loans, he said at the time.

“What the government did was not a diversification of its oil markets, but rather a concentration on the Chinese market, because China became an important source of external financing,” said Luis Zambrano, an economics professor at the Universidad Central de Venezuela. “That decision has had its cost.”

Ties Maintained

Venezuela receives more for oil sold on the U.S. East Coast than it gets from China, as transport costs and country risk used to calculate loan interest rates push down the price, Zambrano said in a telephone interview from Caracas.

The country is exporting about 1 million barrels a day to India and China, Oil Minister Rafael Ramirez said Jan. 23.

While President Nicolas Maduro’s late predecessor Hugo Chavez vilified former President George W. Bush as the “devil,” seized Exxon Mobil Corp. assets and courted Iran’s leaders, he never severed oil ties with the U.S.

“We are sending more oil to China because it was dangerous for us to depend on the political decisions of the U.S.,” Ramirez said Nov. 26.

Venezuela’s oil export basket price rose to $97.18 a barrel in the week of Jan. 27-31 from $96.05 the week earlier and has averaged $95.52 a barrel this year compared to $99.49 in 2013, the oil ministry said on its website. Brent crude for March settlement rose 10 cents to close at $107.95 a barrel on the London-based ICE Futures Europe exchange yesterday.

Dollar Shortage

Venezuela has to diversify its export market,’’ Sen said. “It’s sending more barrels east to India and to China. But it has to discount those barrels more because more and more exporters are earmarking Asia for their destination.”

Maduro is facing a dollar shortage that has pushed annual inflation in the country to 56 percent and fueled a record 73 percent decline of the bolivar on the black market last year. Venezuela’s international reserves have fallen to a 10-year low of about $21 billion this year, as the country struggles to pay billion-dollar debts to food importers and airlines.

Venezuela exported an average of 960,000 barrels a day to the U.S. in 2012, according to the Washington-based EIA. The country’s domestic market is consuming almost 700,000 barrels a day, which continues to rise because of increased demand for diesel, Ramirez said last year. Government subsidies make Venezuelan gasoline prices the cheapest in the world.

U.S. Shale

“The oil that Venezuela sells in U.S. refining centers or on the spot market is billed in the short term, and that money is important for Venezuela’s cash flow,” Zambrano said. “Funds obtained from oil sales to China are used to pay for public sector exports from China of goods to Venezuela.”

Oil output in the U.S. has risen 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the U.S. the world’s largest producer by 2015, five years earlier than forecast last year, the Paris-based International Energy Agency said in November.

Imported oil and products will dip to 28 percent of domestic demand next year, the lowest since 1985 and down from a peak of 60 percent in 2005, the EIA said in December in its Short-Term Energy Outlook. Refined product exports have advanced 16 percent so far this year, EIA data show.

Keystone Pipeline

PDVSA, which owns six refineries in Venezuela with a combined processing capacity of 1.3 million barrels a day, has sought more imports of finished products from the U.S. as accidents restricted its output. In the first 11 months of 2013 Venezuela imported 83,000 barrels a day of refined products from the U.S. and a record 85,000 barrels a day in 2012, EIA data show.

“The problem is not the end destination of the oil but that Venezuela has not been able to increase production despite all the investments they have received,” Roger Tissot, a consultant with Tissot Associates, said by phone from Vancouver.

TransCanada Corp. (TRP)’s $5.4 billion Keystone XL pipeline project, which supporters say will reduce U.S. dependence on countries including Venezuela, cleared a key hurdle today with a U.S. government study that found the project’s impact on the climate would be minimal.

“If the Canadians go ahead with Keystone, they would cut off that little window of opportunity that is left for Venezuela to get its product to the States as the opportunity cost of exporting to the Chinese is much higher than the natural market in the Gulf of Mexico that has been established for many years,” Tissot said.

To contact the reporters on this story: Pietro D. Pitts in Caracas at ppitts2@bloomberg.net; Nathan Crooks in Caracas at ncrooks@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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