Refiners make margin call on Venezuela 

Venezuela produces about 1.4 million barrels a day (bpd) of extremely heavy sour crude that attracts sophisticated refineries in order to maximize refining margins. (Reuters)
Updated 03 February 2019
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Refiners make margin call on Venezuela 

RIYADH: The Brent crude oil price rose slightly to $62.75 per barrel and WTI advanced to 55.26 per barrel at the end of last week, amid concerns over tight supplies of medium and heavy crudes as a result of OPEC output cuts and uncertainties over the implications of US sanctions on Venezuela that have further tightened availability of medium and heavy sour crudes.

Such tightness concerns have pushed the price of the Dubai benchmark slightly above Brent for the first time since August 2015 as reported by Platts S&P Global.

Venezuela produces about 1.4 million barrels a day (bpd) of extremely heavy sour crude that attracts sophisticated refineries in order to maximize refining margins. 

Venezuela’s crude oil exports to the US fell from 840,000 bpd at the end of 2015 to about 506,000 bpd in October 2018. Hence, the US is the primary destination for Venezuelan crude and receives about 41 percent of Venezuela’s total heavy oil exports. Despite the US sanctions, low shipping rates might stimulate the sophisticated Asian refiners, who are already hungry for such heavy crude.

On the other hand, Venezuela imports naphtha from the US to dilute its own heavy crude and help it flow through the pipelines for export.

With the slump in naphtha prices and extremely low shipping rates, diluting Venezuela’s heavy crude is not getting any harder amid ample low-priced naphtha supplies from Europe, Russia and elsewhere.

Since Venezuelan heavy crude is a difficult feedstock to substitute, it will be much easier for Caracas to substitute US naphtha imports, while it will be extremely difficult for the US to replace the Venezuelan heavy crude amid the tight market for this grade. 

Most US refineries are located in the US Gulf of Mexico, and are sophisticated with deeper conversions that run medium and heavy crude from the Arabian Gulf, Venezuela and from the offshore oil fields in the US Gulf of Mexico.

However, the US still face significant technical challenges with some other deepwater fields in the Gulf of Mexico that raises concerns about potential supply growth.

Another resolution to replace the Venezuelan heavy crude is releasing cargoes from the US strategic petroleum reserves (SPR), which the US government might be considering to compensate the upcoming supply shortfall from Venezuela. 

This step might help to replace the Venezuelan crude supply, but concerns over crude quality that might be contaminated won’t be welcomed by the sophisticated US refineries.

This is a crude quality problem that could make the US SPR crude less attractive and less useful since refiners would still need to spend time and money removing contamination before the refining process.

Regardless of any SPR contamination possibility, it is uncertain that these barrels will exactly match the refining configuration of the US Gulf refiners to process the exact quality of Venezuelan crude.

This will be another dilemma that refiners must go through, which might affect their economics.


Saudi Real Estate Refinance Co. plans up to $1.07bn sukuk sale this year

Updated 23 April 2019
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Saudi Real Estate Refinance Co. plans up to $1.07bn sukuk sale this year

  • The plan by SRC, a subsidiary of Saudi Arabia’s sovereign Public Investment Fund, comes as it prepares to purchase more home loan portfolios
  • SRC, formed in 2017, is also keen to tap foreign institutional investors for its debt sale this year

RIYADH: Saudi Real Estate Refinance Co. (SRC), modelled on US mortgage finance firm Fannie Mae, aims to issue up to 4 billion riyals ($1.07 billion) of long-term sukuk this year, its chief executive said on Tuesday.

The plan by SRC, a subsidiary of Saudi Arabia’s sovereign Public Investment Fund, comes as it prepares to purchase more home loan portfolios from mortgage financing companies and banks to boost the Kingdom’s secondary mortgage market.

SRC, formed in 2017, is also keen to tap foreign institutional investors for its debt sale this year, Fabrice Susini told Reuters in an interview.

“Our strategy is clearly to tap the market twice this year,” he said. “We are really looking at probably issuing something between ... 2 and 4 billion riyal that we may be issuing in two tranches.

He said SRC was looking at sukuk in the 10 to 15-year range, to help minimize refinancing risks. “Generally speaking we are trying to issue as long as possible,” Susini said.

He said the company was assessing whether it could also issue bonds in currencies other than the local riyal.

In March, SRC completed a 750 million riyal sukuk issue with multiple tenors, under a program that allows it to issue up to 11 billion riyals of local currency denominated Islamic bonds.

“The rule of the game for us is, like many projects across the Kingdom, attract liquidity from foreign investors,” Susini said.

He said SRC had spent 1.2 billion riyals from its balance sheet buying mortgages from local mortgage financing companies and provided liquidity to these firms.

It has also signed initial accords with several commercial banks to acquire housing mortgage portfolios.

Saudi Arabia’s housing ministry is targeting the mortgage market to reach a total value of 502 billion riyals by 2020 from around 300 billion riyals now.

The government wants to increase activity in the real estate market as it moves to revitalize the economy and is taking steps to reform the sector as part of its 2030 reform plan.

It has been working with developers and local banks to counter a shortage of affordable housing — one of the country’s biggest social and economic problems. Saudi Arabia wants 60 percent of its nationals to own homes by 2020, up from 47 percent in 2016.

The size of real estate financing relative to its gross domestic product is 5 percent in Saudi Arabia compared to 69 percent in the United States, 74 percent in the United Kingdom and 43 pct in Canada, the housing ministry has said.

“The goal of SRC in this market was to make sure that we will be able to refinance at least around 10 percent of the market in 2020, and 20 percent of the market by 2028,” Susini told Reuters.