The Fuse

Do Foreign-Owned Refining Assets Undermine U.S. Energy Security?

by Matt Piotrowski | July 19, 2017

The possibility that Russia may soon own refineries in the U.S. if Venezuela’s PDVSA defaults on its loans from Rosneft has pushed the risks of foreign companies owning energy assets in the U.S. into the spotlight. Since the 1980s, the amount of foreign-owned refining capacity in the U.S. has increased, and the possibility of Russia, an adversary that controls roughly 11 percent of the world’s oil production, taking over downstream assets has prompted worries about U.S. vulnerabilities in energy and national security. Assets that are owned or controlled by a foreign government face the conflict of serving the economic interests of the firm versus taking action that benefit the objectives of the foreign government.

Assets in the U.S. that are owned or controlled by a foreign government face the conflict of serving the economic interests of the firm versus taking action that benefit the objectives of the foreign government.

As of now, some 30 percent, or roughly 5 million barrels per day, of U.S. refining capacity is owned by foreign companies.

There are a number of foreign companies whose own U.S. downstream capacity don’t necessarily raise eyebrows. These include Britain’s BP, the Netherlands’ RoyalDutchShell, Israel’s Delek, France’s Total, Mexican Pemex’s JV with Shell, and Canadian Husky Energy. Petrobras, Brazil’s state-owned company known for rampant corruption, is considering selling its refinery in Texas. But ownership by the Saudis and Venezuela is another story, given that their companies have ties to their respective governments and, by extension, OPEC. Furthermore, their refineries prefer to purchase their own oil instead of U.S.-produced crude. Saudi Aramco, under Motiva Enterprises, fully owns the Port Arthur, Texas facility, the largest U.S. refinery at 600,000 barrels per day (b/d), and Venezuela’s PDVSA has a 49.9 percent stake in Citgo, which runs more than 700,000 b/d. Capacity at Port Arthur and Citgo plants is configured to use heavy crudes, such as those produced in Saudi Arabia and Venezuela, rather than light, sweet shale.

CFIUS review of Russian ownership of Citgo plants?

In 2016, Venezuela’s state oil company, PDVSA, secured a loan from Russia’s Rosneft by using 49.9 percent of its shares in Citgo as collateral. Should PDVSA default, the refineries will be transferred to Russian ownership. What effect such a transfer would have on the U.S. oil market and economy is up for debate. Given that it would be in Rosneft’s business interests to keep the refineries running efficiently, the U.S. economy may not see any harm. In an unlikely worst-case scenario, the Russian company, in retaliation for any measures taken by Washington or its allies, could withhold the supply of gasoline, diesel, and other refined products on a whim. Citgo now owns roughly 4 percent of U.S. refining capacity. These plants going offline would cause prices to spike, particularly in the high-demand summer driving season, but lost supply could be offset by higher refined products imports or other refineries increasing their runs. There would also be questions surrounding what crude the Citgo plants would run under Rosneft’s ownership. One is located in Lemont, Illinois, but the other two are on the Gulf Coast. Would they import Russian crude, continue to source volumes from Venezuela, or use U.S. heavy crudes? Currently, the U.S. imports a negligible amount of Russian crude, but does take in roughly 300,000 b/d of products.

In an unlikely worst-case scenario, Rosneft, in retaliation for any measures taken by Washington or its allies, could withhold the supply of gasoline, diesel, and other refined products on a whim.

It’s unclear whether the Trump administration will try and block Rosneft from taking over Citgo. It is currently mulling potential sanctions against Venezuela, including a ban on U.S. imports of Venezuelan crude, according to Bloomberg. Refiners have come out against such a move, arguing that the loss of barrels from the U.S.’ third largest crude supplier would push up oil and gasoline prices. Venezuela sends roughly 800,000 b/d, or more than 20 percent of the U.S. total crude imports, with Valero, the largest U.S. refiner, as a major buyer other than Citgo.

Regarding the possible takeover of Citgo’s refineries by Rosneft, the White House could halt the takeover on national security grounds through the Committee on Foreign Investment in the United States (CFIUS). President Gerald Ford established CFIUS as a monitoring body with an executive order as a response to concerns over OPEC investment in the U.S. in the aftermath of the 1973 Arab Oil Embargo. The 1988 Exon-Florio Amendment sanctioned the President to block foreign investments that were considered harmful to national security. President Ronald Reagan then gave this authority to CFIUS, making it an investigative body rather than a monitoring committee.

CFIUS has looked at deals involving refineries before, but has never blocked a sale.

CFIUS considerations have, though, undermined deals to halt foreign ownership in the U.S. In 2005, for instance, China National Offshore Oil Company’s (CNOOC) decision to drop its proposed $18 billion acquisition of Unocal in 2005 stemmed partly from CNOOC’s concerns about an impending CFIUS investigation. More recently, last year, Western Digital Corp., a U.S. hard drive manufacturer, and China-based Tsinghua Unisplendour Corp. scrapped a deal last year after CFIUS indicated that it would look at the Chinese business buying a 15 percent stake.

Members of Congress and foreign policy experts argue that Rosneft and other state-owned Russian companies would serve as Moscow’s outfits to influence the geopolitical environment in its favor.

Given the growing tension between the U.S. and Russia, a CFIUS review may occur should PDVSA default. Members of Congress and foreign policy experts argue that Rosneft and other state-owned Russian companies would serve as Moscow’s outfits to influence the geopolitical environment in its favor. In April, an oversight letter was sent to U.S. Treasury Secretary Steven Mnuchin urging CFIUS to review the 2016 Citgo-Rosneft asset transfer. CFIUS’s ability to halt a Rosneft takeover, however, is complicated. Citgo has such a large presence in the U.S. downstream market that the Treasury Department would likely have to grant the company special licenses for it to continue to operate efficiently and keep any disruptions from occurring, said current and former U.S. officials who were quoted by Dow Jones.

No review likely of Aramco

Amid growing concerns about Russia’s influence in the U.S., the potential takeover of U.S. refining assets has raised alarms. Simultaneously, some argue that it is ironic that ownership of downstream facilities by Venezuela and Saudi Arabia, both of whom are OPEC members, has gone under the radar for decades. Harold Hamm, CEO of Continental Resources who was also a campaign advisor to President Trump, suggested that CFIUS should scrutinize the breakup of Motiva Enterprises, the joint venture between Royal Dutch Shell and Saudi Aramco, since it gave the Saudis full ownership of the country’s biggest refinery. It is doubtful that there is political will to scrutinize Aramco’s dealings in the U.S., despite volatile relations between the two countries over the years and the Justice Against Sponsors of Terrorism Act, which allowed victims of 9/11 to file a class action lawsuit against Saudi Arabia. Aramco said it will invest $30 billion in Motiva through 2023 and the two countries have agreed on a number of deals worth $300-$400 billion involving defense, infrastructure, and energy. Last year, reports surfaced that Aramco was interested in buying the 270,000 b/d Lyondell refinery in Texas, but the seller decided to hold onto the plant.

Some argue that it is ironic that ownership of downstream facilities by Venezuela and Saudi Arabia, both of whom are OPEC members, has gone under the radar.

Some see foreign ownership of downstream assets limiting domestic oil production. Hamm argues that U.S. producers ought to increase their crude exports to boost global market share as a step to counteract foreign-owned refineries importing their own oil instead of relying on U.S. output. In a statement as the Chairman of Domestic Energy Producers Alliance (DEPA), Hamm said: “With foreign refinery ownership hovering near 30 percent customized for the owners blends of heavy crudes [that are imported], U.S. production must be exported in ever increasing volumes as more development occurs.”

The U.S. imports roughly 8 mbd of crude, so whether or not foreign companies own U.S. refining assets, the country still has to source volumes from a variety of sellers. Whatever the case, Hamm’s comments reflect how sensitive a topic this issue has become. Since refineries are important strategic energy assets, expect more scrutiny of any foreign takeovers or buyers in the future.

 

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