U.S. President Donald Trump said on Sunday that oil from a recently struck deal with Venezuela will be used to replenish the Strategic Petroleum Reserve, adding that the “topping out” process will begin shortly. But it’s not that easy and Energy Secretary Chris Wright hinted as much on Wednesday while visiting Venezuela.
“We’ll swap you a barrel of heavy crude for a barrel of light or medium United States crude,” Wright said during an interview on CNBC, calling oil markets fluid.
Venezuelan crude’s high sulfur content and dense nature are largely unsuitable for the U.S. emergency stash, traders and analysts said. A swap, however, may be the best option for helping refill the reserve.
WHAT’S GOING ON?
Refilling the emergency stash is crucial to the Trump administration’s energy dominance agenda after Washington recently began releasing millions of barrels of oil from the Strategic Petroleum Reserve as part of a global effort to calm markets during the war with Iran. The major release – up to 172 million barrels from the United States – and low levels of inventory now have raised concerns about cavern damage, and how quickly the U.S. can respond in a supply crisis.
With the reserve now at a 44-year low and Washington set to gain access to billions of barrels of Venezuelan crude, one solution would be to pump those barrels back into the stash. But stark quality differences between Venezuelan crude and the current specification for SPR crude make that idea unlikely, traders and analysts said.
Instead, the U.S. government may swap Venezuela’s dense, high-sulfur crude for light- or medium-density American oil to fill the reserves, Wright said on Wednesday, a move that would help it circumvent quality challenges and replenish the key supplies.
The U.S. SPR is the world’s largest emergency oil stockpile, and the crude is held in a series of underground caverns on the Texas and Louisiana coasts.
WHY DO SULFUR AND DENSITY MATTER?
While the reserve contains a number of domestic and foreign crude grades, they typically contain a maximum of 1.99 mass percent total sulfur, according to the DOE. Venezuela’s popular oil grades, Merey-16 and Boscan, both contain higher amounts of sulfur than limits defined by the SPR, according to the U.S. Energy Information Administration.
The two grades of oil are also denser than the oil largely contained in the reserve.
This would pose a challenge as refiners are typically configured to process oil with density and sulfur falling within set ranges. Levels above or below that range can impact operations, the yield of refined products and margins.
“The majority of the crude grades Venezuela exports would be incompatible from a quality perspective with SPR caverns,” said Jeremy Irwin, global crude lead for analytics firm Energy Aspects.
The SPR does not contain heavy crude oil and the DOE found that heavy oil storage costs outweigh the benefits, according to a report by the department to Congress in 2016.
Storing heavy oil would present considerable operational difficulties, the report said, adding that the current inventory mix provides the department with fungible crudes that maximize the flexibility of the reserve during a crisis.
HOW DOES THE SWAP WORK?
Exchanges have been used in the past by the government to release and acquire oil. Currently, oil from the SPR is being released in loans that companies will return with a premium of extra barrels. A swap of Venezuelan crude for domestic barrels could be similar.
Typically in an exchange, an oil refiner borrows SPR crude oil for a short time period, due to events such as hurricanes or temporary supply disruptions, and later replaces it in full, along with a premium of an additional quantity of oil.
However, while U.S. refiners could take some more barrels of Venezuelan heavy crude, the appetite may be limited as processing heavy oil requires specialized units that have a set capacity, experts have said. Building new units can be expensive and time consuming.
The U.S. government had in January denied a Reuters report that the Trump administration was exploring a plan that would deliver Venezuelan oil to U.S. refineries in exchange for U.S.-produced crude.
(Reporting by Arathy Somasekhar and Georgina McCartney in Houston: Editing by Liz Hampton, Nathan Crooks and Stephen Coates)