U.S. buyers of Venezuelan oil sub in Shell, BP offshore crude

NEW YORK (Reuters) - Sanctions on Venezuela’s oil industry have made winners out of Gulf of Mexico offshore heavyweights Royal Dutch Shell Plc and BP Plc as U.S. refiners in need of substitutes are scooping up oil produced in the region.

A massive drilling derrick is pictured on BP's Thunder Horse Oil Platform in the Gulf of Mexico, 150 miles from the Louisiana coast, May 11, 2017. REUTERS/Jessica Resnick-Ault

The two major oil companies produce notable amounts of crude oil that refiners have settled on as the immediate replacement for the heavy Venezuelan crude that U.S. refiners relied on for years. Trading volumes in these grades of oil have surged to the highest in months, and prices touched five-year peaks since U.S. sanctions were imposed late in January.

U.S. production has surged to a record 12 million barrels per day, but less than 5 percent of that is heavy oil. The sanctions have hamstrung refineries in the United States, as many giant Gulf Coast facilities need heavier oil to produce high-margin refined products like diesel and jet fuel.

Heavy crude accounts for nearly two-thirds of U.S. oil imports. Of that, Venezuela’s oil accounted for 10 percent of heavy crude imports in 2018 and about 13 percent in 2017, according to U.S. Energy Department figures.

Offshore Gulf oil prices - mostly Mars crude , considered the benchmark U.S. sour crude grade - have hit five-year highs, and sales are up sharply, according to company executives, market participants and data reviewed by Reuters.

“We’re buying more Mars for the current time,” said Marathon Petroleum Corp Chief Executive Gary Heminger. Marathon, one of the nation’s largest refiners, was not a major importer of Venezuelan crude. “Since we’re exporting so much in the light sweet crude markets, you’re going to have to bring in more medium sours.”

Shell operates the most Gulf platforms and BP has the highest volume of output from the region, according to figures provided by the companies. Representatives from the companies would not explicitly link the recent boost in sales of offshore crude to Venezuela’s sanctions, though they did acknowledge the market’s interest.

“We do understand that Mars crude is perceived well in the market right now. We’re happy for that and we take advantage of that,” said Rick Tallant, Shell’s vice president of deepwater Gulf of Mexico production.

Production in the Gulf of Mexico rose to a record 1.7 million bpd in 2018, and is expected to exceed 2 million bpd in the fourth quarter, according to U.S. Energy Department figures.

Sanctions have intensified the need for the oil that is being pumped out of these vast fields. Gulf production averaged 1.89 million bpd in March, up nearly 145,000 bpd from February, said Jodi Quinnell, oil analyst at Genscape.

Graphic: U.S. buyers of Venezuelan oil sub in offshore crude -


Mars generally refers to a medium sour grade of oil produced from the Mars platform, a joint venture between majority owner Shell and BP, located about 130 miles (210 km) off the coast of New Orleans.

Refiners, including Valero Energy Corp and Marathon, have been scooping up Mars from Shell’s trading unit in the weeks following the sanctions, sources familiar with the deals said. Other refiners, such as Phillips 66, were also seen buying Southern Green Canyon crude (SGC), a grade similar to Mars, from Shell.

Trading in those grades has surged. Volumes in the Argus Sour Crude Index (ASCI), a tool reflecting prices of three U.S. deepwater sour crudes including Mars, rose to 614,036 contracts for February, the most in nearly a year, data from price reporting agency Argus Media show.

Volumes in Mars for February delivery rose to 410,536 contracts, the highest since August 2018, the data showed.

Prices of other offshore grades such as Thunder Horse, Bonito and SGC also surged to the highest in five years after sanctions took effect.

Phillips 66 declined to comment and Valero did not respond to requests for comment.


In an auction of federal offshore leases last week, Shell submitted the most high bids for Gulf leases, winning 87 tracts of land valued at more than $84 million. BP grabbed the third-most parcels, winning 23 parcels priced at more than $15 million.

Shell’s pipeline partnership, Shell Midstream Partners, shipped 10 percent more crude on the Mars system to the Gulf Coast last year.

Both Shell’s Tallant and BP’s regional president for the Gulf of Mexico and Canada Starlee Sykes said their companies were continuing to actively invest in the Gulf, where they say crude can be produced at levels that were cost-competitive with that from onshore shale formations.

With several new projects slated to come online as soon as this year, U.S. refiners could replace a good deal of heavy and medium-crude imports with Gulf barrels, said Sandy Fielden, director of commodities & energy research at Morningstar.

“Because of their proximity and ease of access to this market, Gulf producers have a natural advantage selling new output to Gulf Coast refiners,” he said.

GRAPHIC-Top heavy crude producers globally:

GRAPHIC-Venezuelan crude exports to U.S. refiners:

Reporting by Devika Krishna Kumar and Jessica Resnick-Ault; additional reporting by Stephanie Kelly in New York; Editing by Richard Chang and Marguerita Choy