December 8, 2010 / 8:03 PM / in 7 years

UPDATE 2-Lyondell seeks to diversify Venezuela crude supply

* PDVSA crude supply contract to Houston expires July 2012

* Lyondell looks to Canada, Brazil and Colombia supplies

* Plans Houston refinery FCC overhaul in January

* FCC work will improve conversion efficiency

* Lyondell sees margins flat for several years

(Adds details about Venezuela crude supply, Lyondell-PDVSA crude contract, refinery history)

By Erwin Seba

HOUSTON, Dec 8 (Reuters) - LyondellBasell (LYB.N) said on Wednesday it is seeking new crude suppliers for its Houston refinery in order to replace some of the oil provided by Venezuela, which is looking to diversify its customer base beyond the Americas.

A crude oil supply contract with state owned Petroleos de Venezuela SA (PDVSA) expires in July 2012, said Kevin Brown, Lyondell’s senior vice president for refining and oxyfuels, during an investor conference webcast.

“We will change some of our volume away from the current supplies, but not all,” Brown said.

The Houston refinery was a once a joint-venture between Lyondell and Citgo Petroleum Corp, PDVSA’s U.S. refining subsidiary. Lyondell signed the contract for crude from PDVSA as part of the 2006 agreement to buy Citgo’s 41 percent interest in the refinery for $2.1 billion.

Venezuela, which as recently as the 1990s was often the top foreign supplier of crude to the United States, has seen its market share in the U.S. oil market plunge since then.

Last week, for instance, U.S. crude imports from Venezuela were 629,000 barrels per day, about a third of peak levels of 1.7 million bpd in 1998, the year before Hugo Chavez took over Venezuela’s presidency.

(Graphic on Venezuela crude exports to the

During the Chavez era, Venezuelan oil production has fallen sharply and PDVSA, under the president’s tight control, has sought to increase crude shipments to other regions such as China and the Caribbean. That has created some strain between PDVSA and U.S. refineries, including Lyondell, that have long depended on Venezuela’s heavy crude.

Traders said Canadian crude supplies, or heavy crude barrels from Saudi Arabia, could help supplant Venezuelan supplies for Lyondell.

Brown said Lyondell is evaluating crude from Canada, Brazil and Colombia to replace Venezuelan oil. The Houston refinery receives 215,000 bpd in crude from PDVSA, according the filings the company has made with the SEC.

Brown also said Lyondell plans to return the 268,000 bpd crude throughput capacity Houston refinery to full production rates not seen since 2007 by the end of 2012, in part through a planned overhaul of the key gasoline unit in January.

The Houston refinery is called a deep conversion refinery that can produce motor fuels to strict U.S. environmental standards from cheaper heavy, sour crude.

“We are one of the heaviest crude refineries in the U.S.,” Brown said.

The refinery’s 110,000 bpd gasoline-producing fluid catalytic cracker currently limits the refinery’s deep conversion capacity to 230,000 bpd, he said because of decisions made in a 2007 FCC overhaul.

“We chose the wrong technology,” Brown said. That technology was implemented poorly by the company.

In 2007, the company was under a different management.

Once the FCC overhaul is completed, the refinery expects to expand the deep conversion capacity to 265,000 bpd, Brown said. The project will cost about $25 million.

Improvements in the Houston refinery’s sulfur recovery system are planned for 2012-2014. That project will cost between $50 million and $75 million.

The company expects little change in global refining market due to flat economic grown in next five years.

“We expect margins to be essentially flat over the next several years,” said Kevin Brown, Lyondell’s senior vice president for refining and oxyfuels.

At the company’s Houston refinery, per-barrel margins are expected to run between “$15-$18 for the foreseeable future,” he said. (Additional reporting by Joshua Schneyer; Editing by Marguerita Choy)

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