U.S. sanctions on Venezuela create short-term gains for Canadian oil producers

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An oil worker walks past a drilling rig at an oil well operated by Venezuela’s state oil company PDVSA in Morichal July 28, 2011. (Reuters)
An oil worker walks past a drilling rig at an oil well operated by Venezuela’s state oil company PDVSA in Morichal July 28, 2011. (Reuters)

U.S. President Donald Trump’s threats this week to take “strong and swift economic actions” against Venezuela, including its oil sector, could give Canada’s oil industry a little boost.

Venezuelan President Nicolas Maduro’s plans to create a “constituent assembly” with the ability to rewrite the country’s constitution has been called by his opposers a plot to retain control of the country beyond his term.

Trump issued his warning a day after seven million Venezuelans participated in a symbolic referendum vote rejecting Maduro’s plan. The U.S. president called Maduro a “bad leader who dreams of becoming a dictator.”

Although the U.S. has currently only imposed sanctions on former and current senior officials in Venezuela, measures targeting the country’s oil sector could be next which might end up benefiting Canada, according to economists.

“If you took a look at the raw numbers, eight per cent of U.S. oil imports come from Venezuela,” says Guy Holburn, an economics professor and director of Ivey Business School’s Energy Policy and Management Centre in London. “It’s a reasonably significant proportion of the overall oil imports so imposing sanctions would mean that refineries would need to find alternative sources.”

He points out that Canada currently accounts for about 30 per cent of U.S. oil imports and is the largest single provider in terms of U.S. oil imports.

“Canadian crude is a reasonable substitute for Venezuelan crude given that they’re both heavy crude types and (some) Gulf refiners are configured to refine heavy crude oil,” says Holburn. “In that sense reduction in imports from Venezuela could be highly positive for Canadian oil producers.”

Canadian producers could also see upward pressure on oil prices if there’s a greater level of demand which Holburn and other economists say could help narrow the gap between Canadian and U.S. oil prices.

“It’s really going to depend on the longevity of any sanctions that are applied – it’s difficult to predict what the Trump administration is going to do on this particular issue and how long it’s going to last,” he says. “So I’d be cautious about thinking this would be a long-term gain or benefit for the Canadian oil industry (rather than) a favourable but temporary benefit.”

However, a temporary relief would be better than nothing for oil producers who have had a bit of a rough month as the Bank of Canada hiked the overnight lending rate, resulting in a strengthening loonie while oil prices held at US$45 barrel.

But some have argued that any increase in import of Canadian oil might require alternative forms of infrastructure to meet capacity.

“We’re moving around 400,000 [barrels per day] to the Gulf already on the various [pipeline] systems that are open,” Robert Skinner, executive fellow at the University of Calgary’s School of Public Policy told JWN. “So that means any incremental volume would have to go by rail. But the benefit of an uptick in heavy oil price might be partially withered away by the higher transportation cost of rail.”

Holburn says that while the exact capacity utilization of current pipeline infrastructure is proprietary and thus closely guarded, Canada could benefit more generally as a reputable and reliable partner for the U.S.

“Venezuela is an example of a country that’s got a much less stable political domestic environment where sanctions are going to be more of a risk,” he says. “Canada has a long history of being a trusted trading partner and from that perspective, long term investments help both countries.”

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