U.S. ban on key oil material could choke Venezuelan production

Production in the Orinoco oil belt, which accounts for half of the country’s output, depends on heavy naphtha imported from the U.S. to reach global markets. Naphtha is used as a diluent to reduce the viscosity of Venezuela’s tar-like extra-heavy oil, and help it flow through 62 mi of pipelines to the nation’s coast, where it can be either upgraded or exported.

Venezuela that once was South America’s largest oil producer has seen a steady decline in production amid lack of money for maintenance and exploration. Crude output may slump to a 29-year low this year. The U.S. has already imposed sanctions on more than a dozen top Venezuelan officials and now may target oil trades. Venezuela imports about 2 MMbbl of heavy naphtha per month, and all of it comes from U.S. Gulf refiners, according to data compiled by Bloomberg.

“The impact of a naphtha shortage ultimately comes down to the operational integrity of the heavy oil upgraders in Venezuela,” Pablo Medina, V.P. at Welligence Energy Analytics, said by email. “If the upgraders were to encounter operational issues or come offline, naphtha demand would increase significantly for heavy oil blending purposes.”

The U.S. is weighing whether to ratchet up sanctions against Venezuela, and those could include banning oil imports from and exports to the nation, U.S. Secretary of State Rex Tillerson said earlier this month. While banning crude oil imports from the Latin American nation could hurt U.S. refiners, sanctioning exports may disrupt Venezuelan oil production, said Julian Cardenas, research professor at University of Houston Law Center.

Venezuela’s crude production collapsed to 1.67 MMbpd, the lowest output since 2003, according to OPEC data compiled by Bloomberg. An embargo of U.S. crude exports could also affect operations at the Isla refinery in Curacao, operated by Petroleos de Venezuela SA, the nation’s oil company. So far this year, PDVSA has already imported 3 MMbbl of U.S. oil for its refinery in the Caribbean island.