Citgo gains independence as sales threat looms

Venezuela's US refining subsidiary has spent the last year working toward operational independence even as it resists separation from its parent.

The US refiner, a crown jewel of Venezuelan national oil company PdV, was forced last year to operate without its sponsor. US sanctions prohibited business transactions with Venezuela's oil sector in order to support the opposition government vying for power against President Nicolas Maduro.

Venezuela and the 770,000 b/d refiner in the US Gulf coast and midcontinent were so intertwined that the country's creditors convinced US courts that Citgo was an alter ego of the Venezuelan government. That decision, along with the use of the refiner as collateral for bonds, has imperiled Venezuelan ownership of the company.

Citgo bond and annual report documents describe reducing dependency on PdV for crude supplies and equipment contracts. Citgo modified refineries to run more US crude and restored relationships with other oil companies.

Pure trading companies and PdV supplied nearly two thirds of Citgo crude purchases in 2018. By the end of 2019, pure traders fell to 28pcwhile direct transactions with oil companies accounted for almost 60pc of crude supply, Citgo's opposition-appointed board said. The annual report touted this as re-establishing connections with "renowned crude producer companies." But it also underlines the abrupt scramble triggered by sanctions through 2021 that cut off a 300,000 b/d supply contract with PdV.

The changes have made the company's three refineries both more resilient and potentially less entangled with PdV if the company faces a forced sale. But the facilities still have challenges. Profits fell by 70pc from 2018 to 2019, to $246mn. The board attributed the slump to narrowing crude discounts — especially compared to heavy Canadian purchased in the previous year — and lower gasoline margins. The refiner reported a first quarter loss, like all other US refiners, as a demand shock created by efforts to contain the Covid-19 pandemic sent fuel prices plummeting at the end of the period. Citgo supplies — but does not own or operate — a branded retailer network that has faced increased pressure from grocers and other large retailers, the company said.

Three complex refineries

Each of the refineries boast complex equipment able to produce fuels from cheap but difficult-to-process crudes.

Citgo's largest refinery processes the lowest relative portion of heavy sour crude. The 425,000 b/d Lake Charles, Louisiana, refinery can process 145,000 b/d of heavy sour supplies, or about 36pc of maximum capacity. Lake Charles processed about 87,000 b/d of Midland-priced crudes in 2018 — nearly all of the 101,000 b/d of Midland crude the company purchased that year. Keystone Marketlink and the Permian Express pipeline systems combined to supply more than half of the refinery's crude over the past three years. Lake Charles also connects to the Louisiana Offshore Oil Port (Loop) and terminal complexes in St James, Louisiana, and Houston, Texas.

Gasoline makes up most of the Lake Charles refinery's fuel production, at an average 45pc. The refinery has the highest identified yield of jet fuel in the Citgo system, at about 18pc of supply. Diesel production is on the lower end of Citgo refineries at around 25pc. Lake Charles has direct access to the massive Colonial Pipeline system moving fuels through the southeast and up the Atlantic coast into the New York Harbor market. Marine facilities allow access to other domestic or overseas markets.

The 177,000 b/d Lemont, Illinois, refinery processes 90,000 b/d of Canadian heavy crude. The slate and location offer a lucrative combination, though potentially never more so than in 2018. Extensive refinery maintenance, rising output and limited outlets for Canadian crude helped to produce large stockpiles and record deep discounts on the country's heavy exports. The company notes in an annual report ongoing efforts to win back direct business with Canadian suppliers. Lemont alone reported $739mn in profit before interest and taxes that year. The refinery has been the most consistently profitable for Citgo in recent years, and the only facility reporting a profit in the first quarter of 2020.

Lemont relies on Enbridge pipeline systems for 95pc of its crude supplies, and can move products via midcontinent waterways to the US Gulf coast or Great Lakes. Almost half of Lemont's production is gasoline, and a third of it diesel. The refinery produces just 1pc, or about 1,000 b/d, of jet fuel. Benzene, Toluene and mixed xylenes, plus solvents and unspecified other industrial products, round out production.

The Corpus Christi refinery was considered the most dependent upon Venezuelan supplies before last year's sourcing overhaul. Heavy crude now makes up about 60pc of its full run rate, following a 10,000 b/d expansion of the refinery's ability to process light, sweet crudes last year. Light, sweet crudes can fill more than a third of the refinery's slate. Marine deliveries supply most of the refinery's crude, though Corpus also takes production from the nearby Eagle Ford fields by barge and truck.

The refinery reported the highest share of diesel production of the three Citgo refineries, at 35pc. Gasoline makes up about 47pc of the facility's fuel production, and petrochemicals and industrial products fill the remaining 18pc. The refinery lacks pipeline access to major fuel markets and reports the smallest profit of the three refineries over the past two years.

By Elliott Blackburn