Canadian vs Venezuelan oil: The Real Importance of Keystone XL

This is an email from Kermit Hoffpauir, which I’m sharing with my readers,

The Real Importance of Keystone XL

After constantly reading all of the media coverage regarding the Keystone XL and its importance, there are some very key facts missing.  This pipeline has geopolitical importance and not because it would be carrying just any grade of crude oil, but a heavy crude oil with an API gravity of 20, or less.  Here I would like to address the fact that Canadian Syncrude is a replacement feedstock for refineries producing an important commodity, Venezuela’s crude problems and the cost of converting “regular” refineries into heavy crude process ones.

I had originally written an email describing this and sent to a friend who posted it as an article, on his website here

For those unaware of crude oil and types of refineries and where sources of crude oil are from for them and certain products, I have already proposed that Venezuela is the sole major beneficiary of the blocking of the Keystone XL.  Meanwhile the chattering class is hollering Warren Buffett’s railroad, there is much more to this than that.

First, Keystone XL was to bring HEAVY crude to the Gulf Coast (TX & LA) where 12 refineries use heavy crude as a feedstock.  Primarily this is Venezuelan crude, which is a good bit less expensive and great for producing petroleum coke.  Canadian Syncrude is also a heavy crude, though not as heavy as Venezuelan, and would be a stable supply.  We have imported around 1.2 Million Barrels per Day of this crude in recent years.  Additionally, Hovensa (Hess Oil/PDVSA 50/50 venture) imports a substantial percentage for its refinery in St. Croix, the largest refinery on U.S. soil rated at 500,000 barrel per day crude charge capacity.

Hovensa is shutting down!

That would mean that Venezuela LOSES over 1 Million Barrels per Day of oil exports.  There are very few refineries in the world to utilize its crude as a major feedstock.  It could be used as blending with light crude but not much else.  All the talk about Warren Buffett is a sideshow, and should have nothing to do with the real reason behind Keystone XL.

Petroleum coke technology is a result of squeezing the very bottom of the barrel, into producing more gasoline.  In the late 1970′s a market was developed for fuel grade petroleum coke, and by the early 1980′s the one time nuisance by product, petroleum coke suddenly became profitable.  Almost overnight, Venezuelan crude became desirable for several refineries, located mainly in Texas and Louisiana, which had the ability to cost effectively refine it.  Billions of dollars were poured into these and other regional refineries in upgrades, and export facilities.  By the early 1980′s Lake Charles, LA became the center of the petroleum coke exports for the world, with both the Citgo and Conoco refineries going full bore into producing and exporting, through the newly build state of the art outdoor storage facility connected to the Port of Lake Charles Bulk Terminal No. 1.  By 1982 ships loading from 10,000 to 40,000 tons of this cargo were headed to many part of the world, but in particular to Livorno, Italy for use as a fuel to replace coal in lime kilns for cement manufacturing.  A small West German steel company’s (Otto Wolff) trading division played a key role in this and surpassed the two former leaders, Great Lakes Carbon and International Minerals & Chemicals, in contracts with petcoke producers to supply the new European fuel market.  Heavy crudes are great for producing petroleum coke, not light crudes such as those coming from the new shale oil production or Alaskan North Slope.  The only type of crude equivalent, here in the U.S., is around Bakersfield, CA.

While Houston is NOT a key petroleum coke market (contrary to Newt Gingrich’s claim that it would consume Canadian Syncrude) Lyondell’s refinery there has been a leader in petcoke production and use by building a cogeneration unit with the metalurgy required for the higher btu value, over coal, to use some of its petcoke production.

All of this was BEFORE Venezuela’s state oil company, PDVSA took part ownership position in several refineries in the U.S.

Today, the U.S. is the world giant in petcoke production with over 53,000,000 tons per year being produced annually.  It exports close to 50% of that capacity (8 times the exports of Venezuela).  China has in fact increased its petcoke production capacity to 50% that of the U.S. and imports more from elsewhere.

Since Hugo Chavez came into power, Venezuela’s crude oil production has declined by 35%.  In late 2002 and well into 2003, a large number of management and professional employees of PDVSA went on strike to protest Chavez’s power and policy.  This sent Gulf Coast refiners scrambling for a replacement heavy crude, the declining PEMEX grade of Mayan Crude filled the gap for the several months it was needed.  There is no major source of such a heavy crude outside of Canadian Syncrude.

The capital investment required to refine Canadian Syncrude is nothing to sneeze at.  ConocoPhillips spent $4 Billon on its Wood River, IL refinery in new process units and upgrades.  Marathon spent $2 Billion on its Detroit refinery for the same reason.  ConocoPhillips was lucky that it only had to spend a few hundred million dollars at its Borger, TX refinery and converted a 200,000 bpd pipeline from Cushing to Borger to enable it to handle heavy crude.  Hovensa had spent $8 BILLION in the late 1990′s to enable it to take more Venezuelan crude.  It had successively converted 2 crude units in previous years, into visbreakers, and lowered its overall crude capacity for the the world’s largest at 650,000 bbls per day to approximately 500,000 bpd to capitalize on the lower prices of heavier crudes.

One more thing.  Canadian crude sells for $68 per bbls at terminal of origin in Hardesty.  Venezuelan sells for the same as Brent but with a $5 –10 discount at port of origin loaded aboard ship which makes it above $110 per bbl.

Here is a little more about fuel grade petroleum coke

Tags: ,

3 Responses to “Canadian vs Venezuelan oil: The Real Importance of Keystone XL”

  1. jlh Says:

    Thank you. I have never seen such a lucid explanation. I had never even heard of petrocoke.

  2. Glenn Says:

    Gut reaction is “heck with Venezuela, let’s get the oil from Canada.” Fact is the market economics should drive the proposition except for one little political angle: Chavez is about to croak and the opposition will be standing by to reintegrate with the free market. So how does geopolitics play into Keystone? Or does it?

  3. Kermit Says:

    Canadian crude at terminal in Hardesty is $68 per bbl. Venezuelan crude loaded ship at Venezuela $100+. Add freight costs.

    Free market rules would make that a no brainer. Venezuela really does not have any other place to go with its type of crude to get that kind of price.

    The most complex deep conversion refineries presently existing in the world are those in TX & LA.