The U.S. decision to ease sanctions and allow it to resume oil imports from Venezuela will hurt Canada’s oil sector, according to industry analysts.
It’s another blow by the administration that cancelled the 830,000 barrel per day Keystone XL pipeline from Canada in January 2021. Now officials are seeking alternate supplies to replace imports from Russia and keep costs down for Americans.
“They should be talking to Canada instead of Venezuela,” says Phil Skolnick, a New York-based analyst with Eight Capital.
The importance of heavy oil
In question is the massive market for “heavy oil” – which both countries produce – in the U.S. Gulf Coast refining cluster. Canada is now the largest supplier to the region, in recent years helping replace sinking imports from Venezuela amid what IHS Markit called “decades of decline and decay.”
Imports from Venezuela stopped entirely in 2019 after the U.S. imposed additional sanctions to pressure authoritarian leader Nicolás Maduro to leave power.
The Biden administration says the move to ease the sanctions is a result of Venezuela’s government taking steps to improve humanitarian conditions. But negotiations were in fact underway months ago as a potential solution to replace oil from Russia following its invasion of Ukraine.
More Venezuelan oil to the U.S. Gulf Coast could push out imports from Canada, causing Canadian producers to receive lower prices because of a wider “differential” or discount compared to benchmark West Texas Intermediate.
This has a ripple effect to everyday Canadians because government royalties are paid on a sliding scale based on oil prices – the lower the price received, the lower the royalties.
“Politics aside, this is a significant negative to Canadian oil differentials,” Dan Tsubouchi, chief market strategist with Canadian investment management firm SAF Group, wrote in a research note.
Western Canadian Select, Canada’s primary blend of heavy oil, is already trading at the widest differential to WTI since early 2020. It’s the result of increased production and not enough pipeline capacity, as well as the U.S. government’s decision to release similar quality oil from the Strategic Petroleum Reserve.
Venezuela could happen quickly
Skolnick says the impact of easing the sanctions on Venezuela will depend on how quickly Chevron – the company granted the license to proceed – can bring production online. The license entitles Chevron to restart production in existing fields, but not start up new ones.
Tsubouchi said it could happen faster than many expect, as Chevron can now provide important equipment and supplies like diluent for pipeline blending and diesel for reliable power.
“An increase of even 100,000 or 200,000 barrels per day would be significant to Canadian oil,” he wrote.
“Certain things will happen quickly.”
Meanwhile, Venezuela remains one of the world’s worst offenders on human rights, with a score of 14 out of 100 on Freedom House’s Global Freedom Index. Canada’s score is 98.
The U.S. has refused to recognize Maduro’s presidency since 2019, declaring that he was not re-elected democratically and fosters policies “marked by authoritarianism, intolerance for dissent, and violent and systematic repression of human rights and fundamental freedoms.”
There’s also evidence that Venezuela’s heavy oil is worse for the environment than oil produced in Canada.
A 2018 study led by researchers at Stanford University found Venezuela’s emissions per unit of oil to be higher than Canada’s on average (20 grams of CO2 equivalent per MJ of energy compared to about 18 gCO2e/MJ).
Researchers noted that Canada was only one of a handful of countries with “higher quality data,” meaning that their estimate for Venezuela is likely incomplete.
The study also used data from 2015, and significant progress has since been made in Canada to reduce emissions intensity. Average oil sands emissions per barrel decreased by 21 per cent from 2009 to 2021, according to S&P Global.
If it had been allowed to proceed, the Keystone XL pipeline was expected to start operating mere months from now, in the first quarter of 2023.
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