U.S. Department of Commerce may defuse US oil export controversy

Political pressure-both for and against allowing U.S. oil exports-may prompt the Commerce Department to resolve the controversy and clarify its policy through a formal rulemaking process, which could open the door for more shipments of minimally processed condensate, but also significantly delay any further agency export approvals, according to financial analysts and other market observers.

The U.S. Department of Commerce faces a growing pressure to answer questions from anti-export Democratic senators who have challenged the legality of its recent private rulings to allow Pioneer Natural Resources Co. and Enterprise Products Partners LP to export condensate after processing it through a relatively simple stabilization process.

In a July 2 letter to Commerce Secretary Penny Pritzker, Sens. Ed Markey (D-Mass.) and Robert Menendez (D-N.J.) said the rulings by Commerce's Bureau of Industry and Security (BIS) appear to violate the 1975 Energy Policy and Conservation Act, which prohibits crude oil exports but which does not prohibit the export of refined products. The letter noted that current BIS regulations classify condensate as crude.

The senators also requested copies of the rulings-which have not been publicly disclosed-as well as copies of other requests for similar rulings, and they asked whether Commerce intends to allow export of other, heavier forms of crude that go through similar minimal stabilization processes and has BIS considered a formal rulemaking process.

Clarifying the extent to which exports of minimally processed condensate is allowed to be exported has become a central question in the controversy over whether to roll back the 1970s-era ban on crude oil exports. Commerce's decisions on just how much refining is necessary to turn ultra-light condensate into a petroleum product"-and thus eligible for export-could also extend to similar questions pertaining to the stabilization and refining process of heavier crudes.

Commerce may opt for a rulemaking proceeding to defuse any legal issues clouding its actions and to collect public comment in hopes of developing more political consensus on the hotly debated question of whether more U.S. oil exports would be in the national interest.

A rulemaking also would help the Obama administration sidestep a political hot potato and put off until after the upcoming November elections any oil export decisions that might either anger its political base--especially green activists opposed to any incentives for more domestic oil drilling-or undermine Democratic candidates in pro-oil states.

The focus on condensate exports follows growing pressure from oil producers for the Obama administration to lift the crude export ban, with the industry saying, allowing greater exports is needed to address operational problems caused by the shale boom and to enable the nation to realize the full benefits of its new oil wealth.

Industry officials say rapidly growing production of light, tight oil (LTO) from U.S. shale formations is far out-stripping U.S. refining capacity, which is largely configured to process heavier imported crudes.

And while export opponents-including some refiners--charge that sending more U.S. oil overseas might raise U.S. gasoline and industrial feedstock prices, oil producers say U.S. consumers would see relief at the pump from more exports.

Producers point to a recent study by IHS Energy that found that lifting the ban on exports of U.S. crude oil would lower domestic gasoline prices an average of 8 cents a gallon by pushing down the price of crude on international markets.

The IHS report found that lifting the export ban could increase U.S. oil production from the current 8.2 million barrels per day (mb/d) to 11.2 mb/d in 2022 as U.S. producers respond to rising domestic oil prices, which would increase to prices seen in the global market. The $15 to $20 discount of U.S. LTO to Brent forecast through 2017 under current export restrictions would be largely eliminated, the study shows.

The international North Sea Brent crude price would fall $3-$5 per barrel through 2030 with the increased U.S. supply, which would cause a drop in prices at the pump, as gasoline prices are more closely linked to the Brent crude prices than to the price of domestic crude, according to the IHS study, which was sponsored by several of the nation's largest producers and oil services companies.

The crude export ban, along with bottlenecks in the U.S. crude oil pipeline system, have led to deep discounts of U.S.-produced LTO relative to Brent prices. The inexpensive U.S. crude, along with relatively cheap energy inputs due to low natural gas prices, have allowed U.S. refiners to turn profits much higher than their European competitors in the last three years, with earnings per barrel more than $7 higher for the U.S. refiners in 2013, according to U.S. Energy Information Agency (EIA), part of the U.S. Department of Energy.

At the same time, gasoline exports have risen from roughly 200,000 barrels per day in 2009 to more than 550,000 barrels per day last year, according to the IHS study. The price of gasoline is closely tied to international crude prices in large part because it is traded on the global market.

Not surprisingly, some refiners such as Valero Energy Corp. have opposed lifting the export ban, saying that refiners can make the investments needed to change configurations to allow for greater processing of light crudes.

The IHS study concludes that lifting the overall crude export ban would eliminate what could grow by 2018 to a $15 per barrel discount of U.S.-produced LTO-with wellhead prices reaching a discount of as much as $25 per barrel in the Bakken Formation. Removing those artificially low prices through lifting the export ban would unlock huge economic benefits of greater production and ultimately more jobs, a lower U.S. trade imbalance and lower prices at the pump, IHS Energy concluded.

The study does acknowledge, however, that over time refiners would have the ability to reconfigure from heavy crude oil refining to LTO refining to absorb rising U.S. production if the export ban stays in place.

"In the restricted trade situation, the U.S. refining industry is expected to respond to this domestic international arbitrage," the IHS study finds. "Significant [crude oil] price discounts could be expected to dissipate over a few years as new capacity is added to process LTO. By 2020, a new equilibrium is achieved based on refinery topping economics."

The study also acknowledges that the industry-led efforts to lift the export ban greatly reduce the likelihood of investment in new refineries or upgrades to handle U.S.-produced LTO, as lifting the export ban could make those new facilities uneconomic.

The BIS rulings on condensate exports already have brought that dynamic into play, raising questions about planned investments in condensate splitter refineries that may become less profitable if condensate is exported to fetch higher global prices.

Learn more about IHS The Energy Daily, from which this article was excerpted.

Learn more and download the IHS Crude Oil Export Special Report.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.