As one of his first acts in office, President Trump signed an executive order signalling that the Keystone XL pipeline is on again. For me, it’s a little awkward: no other issue puts the interests of my birth country and my adopted country so directly at odds.

Not to put too fine a point on it: Keystone XL is a kick in the nuts Ottawa has aimed milimetrically at Caracas.

A quick glance at the Map shows you why:

The whole point of Keystone XL is to take Alberta’s extra-heavy oil from the middle of Canada to the U.S. Gulf Coast. And why to the U.S. Gulf Coast? Because you need specialized refineries to process extra-heavy oil, and most of them are on the Gulf Coast.

And why, pray tell, would so many refineries designed to handle extra-heavy oil be concentrated there, of all places? Because that’s the logical place you’d build a refinery to process Venezuelan and (to a lesser extent) Mexican extra-heavy oil!

Keystone XL is, in other words, a naked attempt by Canada to grab Venezuela’s share of the U.S. oil market.

(Aside: in this sense, Keystone XL is, ironically, entirely unlike the other pipeline in the news these days, Dakota Access. That one would bring light crude from North Dakota to the Gulf Coast, but light crude doesn’t compete with Venezuelan crude for refinery capacity, since it uses a whole different set of refineries! In fact, it’s in Venezuela’s interest to have more light crude in the Gulf, as we need that stuff to mix with our extra-heavy crude so it can flow through our own pipelines! In fact, quite a lot of U.S. light crude already does the “round trip” — from the Gulf to the Faja del Orinoco and then back again. More is better!)

But back to Keystone XL. I called Francisco Monaldi, who knows everything worth knowing about the oil industry, to ask him about it. He sounded concerned, but far from panicked.

“First of all, all of this is going to take time. Transcanada,” the Canadian company that would build Keystone XL, “has said they want to reapply for the project, but that only opens up a complicated negotiation with the Trump Administration, which has said, for instance, that they’ll insist U.S. steel is used for the project.”

There are, it turns out, a lot of uncertainties, and the pipeline wouldn’t be ready before the 2020s.

“The pipeline always wins,” Monaldi says, “it’s a matter of reliability of supply.”

Assuming it does get built, though, it definitely spells trouble for Venezuela’s energy strategy. Refineries on the Gulf Coast typically work on long-term supply contracts; they don’t buy oil on the spot market. And when the time comes to sign a long-term contract, it’s hard for oil delivered in ships to compete with pipeline oil.

“The pipeline always wins,” Monaldi says, “it’s a matter of reliability of supply.”

Once a pipeline is in place you can be sure oil will flow through it in a way you can’t be sure with ships, which can get delayed for any number of reasons, from hurricanes to their deadbeat owners being too broke to get the hulls cleaned.

Venezuela, of course, has an ace up its sleeve in this whole debate: Citgo. We own some of the refineries on the Gulf Coast. Nelson Martínez can just pick up a phone in Caracas, call Houston and order Citgo to take Venezuelan oil…or, well, it can as long as Citgo remains under Venezuelan ownership. 

Rut-row…

Keystone XL, in other words, substantially boosts the strategic significance of Citgo to Venezuela…and we just went and mortgaged the thing, putting it up as colateral on a series of loans we may or may not be able to pay! Fannnntastic!

“Look,” Monaldi tells me, “for a very long time Venezuela’s enjoyed a huge advantage having all these refineries on the gulf set up to process specifically its oil. The problem with Keystone XL is that if you lose that, there just aren’t that many other places where extra heavy oil could be processed.”

Back when oil prices were higher, maybe the math would have worked to build new refineries to process our oil. But if, as has so often been speculated, oil faces a new price plateau not too much higher than where it is now, there’s just no way you can afford the huge capital costs of new refining capacity just to process Faja oil.

For Monaldi, it’s simple: we need continued access to refineries already installed in the Gulf. Even if you keep Citgo, Keystone XL will depress prices for heavy oil on the Gulf Coast, just because there’ll be a lot more of it. But without Citgo, you’re stuck.

Which means Keystone XL turns Citgo —49% of which has now been pawned off to Rex Tillerson’s best friend in Moscow— has gone from “nice to have” to “have to have”.

Gulp. 

39 COMMENTS

  1. This article is very educational , explains quite clearly why Citgo refineries are very important for Venezuela, Monaldis comments are spot on …….getting the pipeline built is going to take time …but once its built it can threaten Venezuelan exports to its best market …or make it much less attractive .

    Of course Canadian tar sand crudes are very expensive to extract , perhaps involving more expense than producing it in a (hypothetically) well run Venezuelan production operation , transporting by pipeline isn’t necessarily less costly than transporting it by tanker vessels……, so there may yet remain some competitive advantages to Venezuelan crude supplies to the US Gulf Coast Refineries .

    Of course too low oil prices can also affect the feasibility of building the pipeline as well as the competitiveness of other oil sources within the US or Mexico .

    The big elephant in the room no one has yet discussed is the possibility that the GOP controlled congress will approve a new tax regime which places a 20% added cost on all international oil imports …….in that case notionally the cost of importing Canadian crude or Venezuelan crude would put a damper on any project for getting that crude to the Gulf Coast Refineries……!!

    • A couple of things…
      It is that estimated cost of transporting crude via KXL has been estimated at $6/barrel. You can currently ship crude from Venezuela for $2/barrel, so the pipeline is not cheaper.
      Customers are already looking to places other than Venezuela because of the numerous problems encountered when lifting crude from Venezuela. The article on ships getting dirty should give you some idea.
      The biggest threat to Venezuelan crude is not Canada, it is Venezuela. The oil fields have problems, the upgraders are constantly having problems, the loading terminal are having problems, etc etc. Virtually no maintenance has been done since Chavez took over and started bleeding the country dry, and now things are breaking all over the place. If things keep going the way they are, Venezuela will be lucky to export any crude at all, yet alone compete with Canada or Mexico.

  2. Once again, we see the strategic error in putting all of your eggs in one basket. Venezuela should be creating its own demand for Venezuelan oil by promoting energy intensive industry and the export of the products of such industry (cement, aluminum, steel, petroleum derivatives, etc…) just like we used to… until Chavismo destroyed it. Sigh…

  3. My God – if you are going to write something at least get informed and not mislead your readers which has been your speciality since you launched CC in 2002.

    Venezuela’s heavy crude is exported to Citgo´s refineries in the southern US. Thse refineries can only handle heavt crude and I doubt that PDVSA as the ultimate owner of these refineries will allow Canada to sell its oil to the six refineries we still have.

    Now, the Lake Charles refinery sold by Citgo some years ago to the Koch Brothers is losing money as PDVSA charges a premium for its heavy crude to it. PDVSA could lose this business …………but the supply to its own refineries? Don’t be so idiotic as to even to suggest it.

    The other matter that needs analzing and frankly I don’t have time with so many other revolutionary activitis to attend to – is the production cost of a barrel of heavy crude from the Alberta oil sands. In Venezuela to produce a barrel costs US$22 – I doubt that the oil that will flow through the Keystone pipeline will be less that US$45 per barrel.

    • Venezuela, of course, has an ace up its sleeve in this whole debate: Citgo. Unlike the Mexicans, we actually own some of our own refining capacity on the Gulf Coast. Nelson Martínez can just pick up a phone in Caracas, call Houston and order Citgo to take Venezuelan oil…or, well, it can as long as Citgo remains under Venezuelan ownership.

      Rut-row…

      Keystone XL, in other words, substantially boosts the strategic significance of Citgo to Venezuela…and we just went and mortgaged the thing, putting it up as colateral on a series of loans we may or may not be able to pay! Fannnntastic!

      “Look,” Monaldi tells me, “for a very long time Venezuela’s enjoyed a huge advantage having all these refineries on the gulf set up to process specifically its oil. The problem with Keystone XL is that if you lose that, there just aren’t that many other places where extra heavy oil could be processed.”

      Back when oil prices were higher, maybe the math would have worked to build new refineries to process our oil. But if, as has so often been speculated, oil faces a new price plateau not too much higher than where it is now, there’s just no way you can afford the huge capital costs of new refining capacity just to process Faja oil.

      For Monaldi, it’s simple: we need continued access to refineries already installed in the Gulf. Even if you keep Citgo, Keystone XL will depress prices for heavy oil on the Gulf Coast, just because there’ll be a lot more of it. But without Citgo, you’re stuck.

      Which means Keystone XL turns Citgo —49% of which has now been pawned off to Rex Tillerson’s best friend in Moscow— has gone from “nice to have” to “have to have”.

      Gulp.

      Was that so hard?

      • I’m not arguing here. I don’t get it. Even if Citgo does not remain under Venezuelan management, I don’t see the problem.

        It’s a serious issue effects on the bonds and all of Venezuela, but it seems like an issue of price, and costs of refining. Presumably heavy crude is less expensive because it costs more to refine, so it balances and equates, or competes with the price of lighter grades of crude, to the price of the finished downstream product: gasoline. If Venezuelan heavy is still cheaper than Canadian heavy (point of delivery, delivered to the refinery), any refinery would go with the less expensive product (taking variations in quality into account).

        Another nice thing about capitalism and free markets is that they’re price motivated (supply and demand), not politically motivated on some arcane ideology of some sort. If it becomes an issue of politics and boycotts, then that’s different, and really could leave Citgo with nothing else to processes than Canadian. Maybe I just don’t get it, but it seems that the risk of a political boycott on importation from Venezuela is a greater risk than having a place to refine heavy crude. (The primary risk appears to have already translated into a disaster: Chavez & Sucessoras, or Chavez S.A., take your pick.)

        • Well that’s exactly the point.

          The ‘oil prices’ you see cited in the newspaper are reference prices: they’re prices for particular marker crudes in given areas — WTI in Texas, Brent in the North Sea, etc. The actual price a seller gets is negotiated in terms of a premium over or a discount below the relevant marker in a given market.

          Keystone XL would cause an extra-heavy oil glut at the refinery gate on the Gulf Coast, which spells price war right there. Venezuela would have to deeply discount its crude from the marker to place it, doubly so because when it comes time to sign a long-term supply agreement refiners will always prefer pipeline oil.

          But Venezuelan extra-heavy oil is already expensive to deliver, since it has to be mixed with premium light oil from Algeria or Lagunillas or North Dakota. So you’re an expensive producer having to offer steep discounts to place your oil…what just happened to your margins?!

          • Its my understanding that they will NOT be “blending” the oil from the tar sands. This might change, obviously, with market demands.

            Would you or another contributor know if the refining taking place in other areas where the oils get blended happens “in house” (i.e. prior to filling tankers and shipping it out) or if it gets sold as is and then gets delivered in that state to the refineries?

            My guess is that they blend it when possible, but, production limitations in VZ are likely causing them to sell it at a lower premium as a result.

    • “In Venezuela to produce a barrel costs US $22…” hahahahaha! and JeJeJe Je!!!!! Too bad you believe that number and that “Revolutionary” bullshit. I worked with PDVSA for a long time and I can tell you it’s much higher even not factoring in all the bribes to produce. What a joke. Viva “La Revolucion!!!!”

  4. Supplementing the article here is some additional information about Citgos refineries

    Citgo has 3 refineries , 1 close to Chicago ( Lemont) which feeds on Canadian Crude and 2 in the US Gulf Coast (Corpus Christi in Texas and Lake Charles in Lousiana ), the last 2 with a combined processing capacity of 590 kbd . Although the latter traditionally operated mostly with Venezuelan crude supplies, more recently they’ve had to increasingly rely on non Venezuelan crude supplies because of the general steep fall in Venezuelas production and because more and more oil has to be sent to China to pay Venezuelas huge debt with that country.

    The cost of producing Venezuelan faja crude has gone up considerably because of the mismanagement corruption and waste of Pdvsa run operations ………so it wouldn’t be surprising if the high cost of Canadian crude is now close to equivalent to that of producing Venezuelan faja crude…….!!

  5. I think you misunderstand the undercurrents. This is Trump’s way of saying “so long” to Middle East product. We will be self sufficient – real soon. Venezuela is on the sidelines.

    • Yes, autarky.

      “The world is a unstable place and also happens to hates us, so we can’t rely on them too much.”

      This is not something that started with Trump, though, it goes back to WW2 time, passing throughout all the Cold War period, it was basically the same principle that made Florida become a major orange producer in the 80’s, while before that they used to buy their oranges from South America, what was unacceptable, given how untrustworthy South American economies, institutions, governments and, ultimately, societies as a whole are. This trend was fading a little in the last decades, but it’s coming with full force now.

      They call it ‘MAGA’.

          • There is scant information at this time. I would say that we should be careful not to cast responsibility for violence in terms of religious affiliation. If the person who perpetrated this act, for example, did so in the name of Christianity, or called himself a Christian, I don’t think that would adequately explain the act, nor would it explain Christianity.

          • ” for example, did so in the name of Christianity, or called himself a Christian ”

            Good point, as Christian extremism and Muslim extremism are totally comparable in any variable desired. I will even suggest that Muslims use the slogan “WE WILL CONTROL OUR RADICALS IN THE DAY THAT YOU CONTROL YOURS!!!” to counter this completely nonsense, unjustified, absurd and alt-right prejudice against Muslim terrorism, sharia and the Muslims/Muslim societies that support that!

            Your sense of proportions is very sharp.

        • oranges and bananas have been globally decimated by virus and disease. Florida orange crops are history. There is no solution. Genetically enhanced bananas and oranges are a no-no for now. This has been happening for decades as the crops moved around the globe to beat the disease but no more. Globalization has dealt the final blows.

  6. Question, The map shows there is an existing pipeline. Does that pipeline moves Heavy crude oil? or both?
    What does the Keystone Pipeline add to the existing pipeline? more capacity? faster delivery?

  7. Apparently, the KXL can be built in 2 years, increasing Canadian tar sands product arriving at Gulf Coast refineries by some 300m bbls./da.,which may be equal to Venezuela’s oil exports to the U. S. by then, at their recent ever-declining rate (lol, sick joke–maybe).

      • Wikipedia, U. S. State Dept. estimate–seems too low, I know, but somewhere else in this very wordy Wiki description 1.5 years is mentioned–unbelievable, even if one assumes all permits/agreements at local levels have largely been done over the past 5 years of contentious discussion/political wrangling.

  8. The cost of pipeline transportation is greater than that of marine transportation , example : from way back there were pipelines going from the Maracaibo oil fields to the Paraguana Refineries but in time it became clear that transporting the crude from lake Maracaibo via crude oil tankers was economically much more attractive..

    When Pdvsa bought Lemont refinery close to Chicago the original intent was to have it process Venezuelan crude brought north via a pipeline grid , but in the end the pipeline raised the transportation fee alleging that it cost more to transport heavy oil so Lemont ended up processing mostly Canadian crude which was closer to the refinery…., the economies of pipeline transportation aren’t that great unless the high price of the crude being transported makes up for the cost of its transportation , the danger which the pipeline poses is there , but depending on market variables there will be times when using Canadian crudes vs the alternative of bringing it by tanker from Venezuela wont be that competitive….!!

  9. Quick story: back in 2005 I was working in an advisory-type position for PDVSA, trying to help the strategic planning team identify the long-term threats to the company’s market share. I proposed that the biggest threat came from Canadian producers, who were just beginning to ramp up production.
    The response from the head of strategic planning? “We don’t need to worry about Canada.” When I inquired why, the person replied, “if they start to threaten our position, we’ll just sit down and talk to them.”
    And that was PDVSA’s strategic response to Canadian oil. I shut my mouth, took my money, and I’m still laughing at those fools.

  10. 10 WTF facts of the Venezuelan oil industry:

    1. The KXL will lower the overall cost of the oils sands thus grabbing market share
    2. Mexico is opening their oil industry
    3. Canada is by far a more reliable producer and more reliable country
    4. Venezuela instability and the potential defaulting reflected in difficulties honoring oil contracts
    5. Citgo being mortgaged
    6. Guyana Liza project entering the market (about 2019)
    7. Payments in kind (oil) to China for the already stolen billions of US$
    8. Fracking is making its dent on heavy oil producers (Canada included)
    9. New Gulf of Mexico deep water projects coming on line (e.g. Shell Appomatox)
    10. Rex Tillerson sweet vengeance for the Cerro Negro fiasco (Exxon-PDVSA-VEBA project)

    Lagniappe: low oil barrel has triggered a bunch of technological solutions to reduce production costs. Those technologies are not available for Venezuela. (e.g: partial upgrading, electromagnetic heating-instead of steam inyection, solvent enhanced steam assisted gravity, etc..)

  11. Amazingly well written and pointed article. I missed out on some of the earlier discussion points, especially the CITGO refineries.

    I do believe there are other refineries in the Kansas area (Coffeeville comes to mind) and they have (at least in the past) refined different grades of crude. But time passes and not all memories are intact.

  12. You may be also concerned about the Billings, MT oil refineries. Phillips 66 is now in a 600 million dollar upgrade to take 100% Canadian Tar Sand crude. The other two, Exxon and Cenex, are soon to follow.

    The difference is that these three refineries are already supplied by smaller pipeline coming from Alberta.

  13. There is speculation the Russians also control bonds to give them majority control of Citgo. Assuming the Russians want the enter the U.S. market and the Americans allow it. Another angle has the Russians flipping Citgo to another party like an Arab nation.

    I think Citgo is history and it benefits America to have another more reliable owner. America does not need Venezuela and its oil anymore.

    Don’t see any sweet revenge for TRex…. he passed on all Bolivarian projects. Mobil is another story.

  14. The mortgaging of Citgo most likely is going to bite the Venezuelan government big time.
    When 51% of Citgo was offered as collateral for the new bond issue, only around 20 or 25% of the bond holders took the offer. The 51% number never changed. This gave the bondholders that accepted the offer 4 or 5 times the collateral that was originally intended per Dollar of debt.
    This means that their bonds are secured by the Citgo stake and they will have no incentive to renegotiate again or take a haircut. I do not see where the money will come from to satisfy the bonds. Likewise any default will most likely result in other bondholders putting liens on any Venezuelan assets that they can get the courts to allow them to.
    Venezuela may have a hard time getting paid for any oil if the payments clear through US or European banks. The creditors will be lining up.
    A single missed interest payment could possibly set off a chain reaction of falling dominoes that shuts down foreign monies coming to Venezuela.
    Production continues to fall. The money does not exist to pay the US companies that were ( past tense ) maintaining the oil fields. They are owed billions. This downward spiral will only end with an IMF bailout.
    As long as Maduro and comrades hold power, the IMF will not bail out Venezuela.

    • John , Yours is definitely the sharpest smartest comment in this page on the subject of Citgo, the one that really goes to the root of what the new for old bond swap operation (as it turned out) actually implies, keep those comments coming ……, the prospects for the future are dark and dire …..but we cant hide the truth from ourselves…!!

    • Among the cognoscenti [not me] who track PDVSA/Citgo there seems to be a growing consensus that Citgo is collateralized to something like three or four times its actual value. If true, the enchufados may have created a poison pill in the swap — a default would threaten debtors with years of litigation for pennies on the dollar. Meanwhile the enchufados steal the proceeds from Russia and the swap.

      In any case it looks like bond holders over-value future Vz petro production as Vz will struggle to produce just their own usage.

      • Many here have been using the “mortgage” with respect to the actions of PDVSA/PSUV, seems to me the better term may “hocking”. One implies the intention to pay of the loan for an investment in the future while the other is basically the sale of an asset below market value with the ability to repurchase but without any plan/intention. The real question is what other assets can be “mortgaged” off before the current regime runs out of time without any further depletion of “State” resources.

  15. Bill,
    Thank you for the kind words.
    My heart and prayers are with the people of Venezuela.
    I am currently doing everything I can to get money, food and medicine to my friends in your country.
    The only way that this is going to change is if the people decide they have had enough.
    The opposition leaders are to busy jockeying for position and do what is best for themselves instead of what is best for the people.
    Venezuela needs more patriots and less politicians.
    The Keystone is not the biggest threat to Venezuelan oil exports. The inability to maintain the oil fields without US companies and the deteriorating infrastructure means that output will continue to decline. The Chinese “friends” of the government will keep taking there oil of the top of the production. Resulting in much less available for sale.
    I am sorry to say that I agree with your assessment of a darker future for Venezuela.
    The only good that may come from this is that the Venezuelan people may cherish their liberty in the future and be more protective of it.
    Ronald Reagan once said that democracy is always one generation away from being lost. Meaning that it is incumbent on every one of us to protects the rights and liberties of our Constitution and to protect it for the next generation. There is not a better gift that you can give your children than the right to live in a free society.

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