Last checked at 
By Devika Krishna Kumar and Jessica Resnick-Ault
NEW YORK, March 25 (Reuters) - U.S. sanctions on Venezuela'soil industry have made winners out of Royal Dutch Shell Plcand BP Plc, Gulf of Mexico offshoreheavyweights, as refiners in need of substitutes are scooping upoil produced in the region.
Those two companies produce notable amounts of crude oilthat refiners have settled on as the immediate replacement forthe heavy Venezuelan crude that U.S. refiners relied on foryears. Trading volumes in these grades of oil have surged to thehighest in months, and prices touched five-year peaks aftersanctions were imposed.
U.S. production has surged to a record 12 million barrels aday, but less than 5 percent of that is heavy oil. The sanctionshave hamstrung refineries in the United States, as many giantGulf Coast facilities need heavier oil to produce high-marginrefined products like diesel and jet fuel.
Heavy crude accounts for nearly two-thirds of U.S. oilimports. Of that, Venezuela's oil accounted for 10 percent ofheavy crude imports in 2018 and about 13 percent in 2017,according to U.S. Energy Department figures.
Offshore Gulf oil prices - mostly Mars crude, considered thebenchmark U.S. sour crude grade - have hit five-year highs, andsales are up sharply, according to company executives, marketparticipants and data reviewed by Reuters.
"We're buying more Mars for the current time," said MarathonPetroleum Corp Chief Executive Gary Heminger. Marathon,one of the nation's largest refiners, was not a major importerof Venezuelan crude. "Since we're exporting so much in the lightsweet crude markets, you're going to have to bring in moremedium sours."
Shell operates the most Gulf platforms and BP has thehighest volume of output from the region, according to figuresprovided by the companies. Representatives from the companieswould not explicitly link the recent boost in sales of offshorecrude to Venezuela's sanctions, though they did acknowledge themarket's interest.
"We do understand that Mars crude is perceived well in themarket right now. We're happy for that and we take advantage ofthat," said Rick Tallant, Shell's vice president of deepwaterGulf of Mexico production.
Production in the Gulf of Mexico rose to a record 1.7million barrels a day in 2018, and is expected to exceed 2million bpd in the fourth quarter, according to U.S. EnergyDepartment figures.
Sanctions have intensified the need for the oil that isbeing pumped out of these vast fields. Gulf production averaged1.89 million bpd in March, up nearly 145,000 bpd from February,said Jodi Quinnell, oil analyst at Genscape.
GOING TO MARS
Mars generally refers to a medium sour grade of oil producedfrom the Mars platform, a joint venture between majority ownerShell and BP located about 130 miles (210 km) off the coast ofNew Orleans.
Refiners including Valero Energy Corp and Marathonhave been scooping up Mars from Shell's trading unit in theweeks following the sanctions, sources familiar with the dealssaid. Other refiners, such as Phillips 66, were alsoseen buying Southern Green Canyon (SGC), a grade similar toMars, from Shell.
Trading in those grades has surged. Volumes in the ArgusSour Crude Index (ASCI), a tool reflecting prices of three U.S.deepwater sour crudes including Mars, rose to 614,036 contractsfor February, the most in nearly a year, data from pricereporting agency Argus Media show.
Volumes in Mars <WTC-MRS> for February delivery rose to410,536 contracts, the highest since August 2018, the datashowed.
Prices of other offshore grades such as Thunder Horse<WTC-THH>, Bonito <WTC-BS> and SGC <WTC-SGC> also surged to thehighest in five years after sanctions took effect.
Phillips 66 declined to comment and Valero did not respondto requests for comment.
EASE OF ACCESS
In an auction of federal offshore leases this week, Shellsubmitted the most high bids for Gulf leases, winning 87 tractsof land valued at more than $84 million. BP grabbed thethird-most parcels, winning 23 parcels priced at more than $15million.
Shell's pipeline partnership, Shell Midstream Partners, shipped 10 percent more crude on the Mars system tothe Gulf Coast last year.
Both Shell's Tallant and BP's regional president for theGulf of Mexico and Canada Starlee Sykes each said their companyis continuing to actively invest in the Gulf, where they saycrude can be produced at levels that were cost-competitive withthat from shale formations.
With several new projects slated to come online as soon asthis year, U.S. refiners could replace a good deal of heavy andmedium-crude imports with Gulf barrels, said Sandy Fielden,director of commodities & energy research at Morningstar.
"Because of their proximity and ease of access to thismarket, Gulf producers have a natural advantage selling newoutput to Gulf Coast refiners," he said.
(Reporting by Devika Krishna Kumar and Jessica Resnick-Ault;additional reporting by Stephanie Kelly in New York; Editing byRichard Chang and Lisa Shumaker)
