Whatever It Is, Crude Export Policy Is Shifting

Posted July 22, 2014 at 3:45pm

Despite soaring U.S. oil production in recent years, the prospect of relaxing the 1970s ban on crude oil exports has looked as faint as ever. Last week, though, it was a central subject at an Energy Department conference.

The reason is a recent Commerce Department decision to allow an oil producer to ship abroad some of the ultra-light oils called condensates that are flowing from shale deposits in states such as Texas. These oils need minimal refining and because of that, they are close to processed products that already can be sold to other countries. The implication of this decision is that the government might be moving to allow exports of crude oil.

Amid the oil industry’s increasing calls for lifting the ban imposed after the Arab oil embargo, Sen. Lisa Murkowski, R-Alaska, in January urged the Obama administration to consider ways of easing the restrictions because the increasing supplies of ultra-light oil from shale exploration did not match with capacity of Gulf Coast refiners who had invested in facilities to process heavy crude from Mexico and Venezuela.

Energy Secretary Ernest J. Moniz and White House adviser John Podesta indicated the administration would look into possible responses.

“We’re taking an active look at what the production looks like, particularly in Eagle Ford, in Texas, and whether the current refinery capacity in the U.S. can absorb the capacity increase to refine the product that’s being produced,” Podesta said in May. “We’re taking a look at that and deciding whether there’s the potential for effectively and economically utilizing that resource through a variety of different mechanisms.”

One Company’s Products

In actuality, the Commerce Department’s private ruling to one oil producer in March dealt with a form of crude, albeit an ultra-light byproduct that producers refer to as a “gassy oil or an oily gas” that can be used in fuel and petrochemical production. As much as 40 percent of the oil being produced from the Eagle Ford Shale in Texas is actually condensate, though it is still considered a type of crude oil prohibited from being exported. Commerce assured Enterprise Products that its technology for processing condensate changed the petroleum from a crude oil into products that could be exported.

The market went into a tizzy when The Wall Street Journal broke news of that private clarification last month, but continued confusion over the meaning of the ruling has led to differing conclusions.

A lawyer who helped procure the clarification from Commerce said it could relieve the kind of mismatch Murkowski and Podesta have been talking about.

“They allow for the export of condensate where the U.S. market is the most over-supplied and where producers suffer the deepest discounts relative to world prices,” Jacob Dweck, a partner at Sutherland, Asbill & Brennan, said last week at an event hosted by the Energy Information Administration, though he cautioned against over-interpreting the ruling.

The approved Enterprise procedure is specific to condensate and is a substantial distillation processes that produces separate and different marketable products, he said.

Some producers have interpreted the ruling as applying to a procedure called stabilization used to prepare light oil for transport, a view Dweck does not embrace.

“Stabilization is not distillation,” he said. The Enterprise process “does much more than stabilize the product, it alters the essential characteristics of the condensate stream and creates separate hydrocarbon products suitable for various uses,” he said.

Broader Implications?

John R. Auers, vice president of the oil consulting firm Turner, Mason & Co. is among those who see broader implications in the Commerce rulings.

“The key word was distillation and not condensate,” leaving plenty of room to apply to processes such as topping, which removes light hydrocarbons from oil, Auers said.

“Ultimately I don’t know where the law is going to end up,” he said, but he expects companies will get approval for minimally processed light crude coming out of the Eagle Ford and Bakken shales.

His group saw the ruling as a significant move and changed its market projections. Such a relief valve will allow for enough exports to avoid a predicted scenario where production is tapered down because of an oversupply of light oil, he said, “unless further clarification or limitations are imposed.”

Former White House energy adviser Jason Bordoff agreed the rulings will encourage companies to press for other ways to qualify for exports.

“I think people will push the envelope on what exactly distillation is, on whether that applies to crude oil as well as condensates,” he said.

Murkowski called the recent ruling a step in the right direction and has urged the administration to consider redefining condensates as something other than crude. Last week, she met with Commerce Secretary Penny Pritzker to discuss oil and condensate exports.

“We had an open conversation,” she said in a statement. “I am encouraged that Secretary Pritzker is engaged and that there are ongoing discussions within the department on this issue.”

President Barack Obama could also open exports by determining them to be in the national interest, though Bordoff and others believe the political ramifications of being so closely tied to the decision make that less likely.

“That’s probably a little bit of a heavier lift,” Bordoff said. “That would maybe not be a preemptive action but might come from actual sorts of impacts on the ground,” such as drilling rigs being idled or projects being canceled.

“That’s the sort of thing that might lead to a significant action like that,” he said.