Ready to compete and change the entire game? US to open the valve on blocked oil exports

Published June 29th, 2014 - 07:13 GMT
Since the 70’s, crude oil is not allowed to be shipped outside the country, but that is about to change.
Since the 70’s, crude oil is not allowed to be shipped outside the country, but that is about to change.

American crude oil export is a new variant entering the global energy equation. Since the 70’s, crude oil is not allowed to be shipped outside the country. But the US Commerce Department’s approval of the first exports of what is being referred to as ‘condensates’ outside North America, is a step in the direction and apparently a game changer in real sense.

The US Commerce Department gave Pioneer Natural Resources Co. and Enterprise Products Partners permission to ship a type of ultralight oil also known as condensates. These can be refined into gasoline or other fuels. Although crude oil still remains banned, under the rulings condensate can qualify as a refined product - and hence permitted to export - as long as the liquid is stabilized and distilled, officials and industry executives maintain.

Washington had been edging, slowly and gradually, toward lifting the crude oil export ban. Whether the decision allowing the export of ultralight, condensate, marks the beginning of the end of the ban on American crude oil exports or not is being debated ferociously within the energy fraternity.

When Wall Street Journal first reported the permission to the two companies to export condensates, there was some confusion. Many felt it meant the US was allowing crude exports to outside the North American continent too. White House too acknowledged later, saying there had been “some misunderstanding”.

The ‘misunderstanding’ gave a fillip to the ongoing speculation on the fate of crude oil export ban. With oil production surging in shale formations, there has been a growing call to allow crude exports from the US.

In its decision, the US Bureau of Industry and Security (BIS) has now determined that condensates minimally processed by cheaper units called stabilizers, which strip out volatile hydrocarbons to ensure safe transport in pipelines, may be freely exported. An opening has been made.

Jacob Dweck, the attorney representing companies before BIS in the condensate export matter, says “tens of companies are now interested” in obtaining similar rulings. Further applications for exports from the US may follow this approval, Morgan Stanley analysts Adam Longson wrote in a report Wednesday.

All this could see US oil exports increase in the short term.

“The flood gates of exports will be opened now,” Ed Morse of Citigroup was quoted by BBC as saying. Morse emphasized that some 200,000 to 300,000 barrels per day of US condensate could be exported by the end of this year and the volume could double in 2015.

The US is awash with light oil from shale formations, including the ultralight oil often being termed as condensate. From 2011 to 2013, US oil output soared by 1.8 million barrels a day, with 96 percent of new production in the form of light or ultralight oil, according to the Energy Information Administration.

With the permission, Obama Administration seems to have opened the door to more exports — without changing policy — by allowing some light oils to be defined as petroleum products like gasoline or diesel, which are not subject to export restrictions. Similarly types of light oils, such as “diluent” and “condensate” are — or will soon be — finding their way overseas too.

That would make the US a major oil exporter and add to its growing volume of fuel exports. The US Energy Information Administration reported the US produced almost 8.4 million barrels a day in May and annual output is forecast to reach 9.3 million bpd in 2015, the highest since 1972.

Last year the country exported a record 2.7 million barrels of fuels per day, making the US the world’s largest exporter of gasoline, diesel and other fuels.

As a consequence of the ruling, shipment of condensates could begin as soon as August. Initially, the shipments will probably be small. The US could export 300,000 barrels of condensate per day by the end of the year, a Citi note says. About 750,000 barrels a day of oil produced from US shale plays is an ultra-light variety known as condensate, said Michael Wojciechowski, head of America’s downstream research for Wood Mackenzie Ltd. As many as 700,000 barrels a day could potentially be exported, the Brookings Institution estimated. On a global scale, the additional US production on the world market will mitigate price spikes, as it already has in response to the unrest in Iraq, Syria and Libya.

Congress is not expected to pass legislation lifting the ban on crude exports before the November 4 elections, as no lawmaker wants to be blamed for a move that could boost US oil prices. One major argument against allowing the US crude to outside world has been that it might cause prices at local gas stations to jump. Not everyone seems to accept it. “It’s not credible to say that if we export more condensates that would cause a spike in prices at the pump,” said Citi commodity strategist Eric Lee.

The shift could, however, be even more controversial because oil prices are hovering above $100 a barrel and oil rich Iraq and Libya are faced with major instability and chaos.

However, there is a positive spin to the ongoing debate too. Any decision to lift restrictions on US crude exports would boost US production, rather lower gasoline prices, and support as many as 1 million additional jobs, energy consultancy IHS said in a report, adding that the elimination of crude export restrictions would benefit gross domestic product and government revenues too.

The study ‘US Crude Oil Export Decision: Assessing the Impact of the Export Ban and Free Trade on the US Economy’ estimated a resulting boost in US oil production would cut the US oil import bill by an average $67 billion/year.

Additional US crude oil production would help lower gasoline prices by an annual average of 8¢/gal, the study estimated. The 8¢/gal is a base case adjusted for inflation, and the figure potentially could reach 12¢/gal given a higher production rate, the study said. Combined savings for US motorists would be $265 billion during 2016-30 vs. what they would pay if the restrictive trade policy remains in place.

 “The 1970s-era policy restricting crude oil exports – a vestige from a price controls system that ended in 1981 - is a remnant from another time,” said Daniel Yergin, IHS vice-chairman. “It does not reflect the dramatic turnaround in domestic oil production, led by tight oil, which has reversed the United States’ oil position so significantly.”

Despite stiff opposition, slowly and gradually, the United States is heading to a more open crude oil export regimen. And this would carry significant impact on the global energy markets too.

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