Obama Administration Seen Widening Exports for Shale Oil

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June 25, 2014

By Zain Shauk, Dan Murtaugh and Rakteem Katakey

June 25 (Bloomberg) — The U.S. Commerce Department opened the door to more U.S. oil exports as long as the crude is lightly processed, tempering the impact of a law that’s banned most overseas petroleum shipments for the past four decades.

The department widened its definition of what’s traditionally been considered a refined product eligible for shipping to customers abroad. That means more of the oil being pumped from U.S. shale formations may be eligible for export after being run through small-scale processing units.

The Commerce Department issued its ruling after Pioneer Natural Resources Co. petitioned for approval to export a type of ultra-light oil that had been stripped of lighter gases to make it less volatile for transport — a minimal level of processing known as stabilization. The ultra-light oil, known as condensate, has been abundant in shale formations during the drilling boom, leading to oversupplies on the Gulf Coast.

“It’s a crack in the door which has otherwise been shut for 40 years,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London, said by phone. “If approvals for condensate exports are extended to more companies, it’ll benefit U.S. producers and processors in Asia, particularly in Singapore and South Korea.”

Distillation Exception

Any oil that has been processed through a distillation tower — a preliminary form of refining — is no longer defined as crude oil, and therefore is eligible for export, said Jim Hock, a department spokesman, in an e-mailed statement yesterday.

Pioneer uses a distillation unit to stabilize oil it produces in the Eagle Ford Shale of South Texas, most of which is condensate.

The Commerce Department “recently confirmed our interpretation that the distillation process by which our Eagle Ford Shale condensate is stabilized is sufficient to qualify the resulting hydrocarbon stream as a processed petroleum product eligible for export without a license,” Pioneer said in an e- mailed statement.

“It’s not exactly going to be a game changer but it’s certainly the next step in providing the market with some relief,” said Robert Campbell, head of oil products research at Energy Aspects Ltd., a London-based research firm.

West Texas Intermediate crude for August delivery climbed as much as $1.47, or 1.4 percent, to $107.50 a barrel in electronic trading on the New York Mercantile Exchange, before trimming gains to trade 0.4 percent higher at $106.43 at 12:26 p.m. in London. Brent oil futures slid 0.7 percent to $113.66.

Economic Forces

“There are certainly a lot of inexorable economic forces that suggest the U.S. is going to relax the export ban in the long term,” Ric Spooner, a chief strategist at CMC Markets in Sydney, said by phone.

Further applications for exports from the U.S. may follow this approval, Morgan Stanley analysts led by Adam Longson wrote in a report today. If more overseas sales are allowed, U.S. condensate could find its way to Asia, from which companies can produce naphtha used in the petrochemical industry, BNP’s Tchilinguirian said.

“A lot of condensate splitting capacity is in Asia and more will be added this year,” he said. “Some of the Asian processors would have been wondering where the condensate is going to come from.”

Restricted Exports

The U.S. has restricted most crude exports since 1975, in response to the Arab oil embargo. Shipments to Canada are an exception, and those averaged 246,000 barrels a day in March, the highest level since April 1999.

“It is certainly the first step towards the lifting of the ban on U.S. crude exports and will be welcomed by the oil world,” Ehsan Ul-Haq, senior market consultant at KBC Energy Economics in Walton-on-Thames, England, said by phone today. “It comes at a time when geopolitical skirmishes have added more than $10 a barrel of risk premium to oil prices.”

U.S. oil producers such as Continental Resources Inc. and ConocoPhillips have been clamoring for an end to the restrictions as shale production has brought a surge in North American petroleum supplies. U.S. crude production has jumped 45 percent since the start of 2012, driven by horizontal drilling and hydraulic fracturing in places including North Dakota and Texas.

Supplies on the Gulf Coast rose to more than 215 million barrels in May, the highest level on record since 1990, according to Energy Information Administration data. Much of that supply has been in the form of lighter crude, and arrived after Gulf Coast refiners made expensive upgrades to their plants to process heavier crudes from places such as Canada and Mexico.

‘First Step’

The Commerce Department’s willingness to qualify more lightly processed crude for overseas shipments should lead to even wider approval of crude exports, said Senator Lisa Murkowski, Republican of Alaska. The decision “is a reasonable first step that reflects the new reality of our energy landscape,” she said.

It could also make plans for more complex processing plants, known as splitters, less economic. Several companies are building and planning condensate splitters that are designed to process lighter crudes from shale formations into products like naphtha, kerosene and gasoil, which are eligible for export.

The plants, built for one-tenth the cost of a complex, full-scale refinery, were also aimed at using minimum processing to qualify oil as a refined product for export.

The first of the units, a 50,000-barrel-a-day processing plant built by Kinder Morgan Energy Partners LP for use by BP Plc, is scheduled to come online in November. BP has signed a 10-year contract to use the facility, which will be expanded to 100,000 barrels a day in 2015. Several additional plants have been proposed by other pipeline or trading companies, and refiners including Valero Energy Corp. and Phillips 66 said they plan to add similar oil processing equipment.

Refined Product

The distillation towers that the Commerce Department says are needed to process oil into an export-eligible refined product aren’t defined by size, said Andy Lipow, president of Lipow Oil Associates LLC, a consulting firm in Houston. The towers could include equipment such as stabilizers that are used in oil fields to separate the lightest gases such as propane and butane from some condensate to prepare it for shipping, he said.

An eventual removal of the export ban would promote U.S. oil production, said Zak Cikanek, a spokesman for the oil industry trade group American Petroleum Institute, which said it hasn’t yet reviewed the Commerce Department ruling.

“Allowing the export of processed condensate would be a very small step toward a much more important goal, which is free trade,” Cikanek said.

Largest Refiner

While Phillips 66, the largest U.S. refiner by market value, has been supportive of lifting the crude export ban, refiners will probably reap lower profits if they are forced to pay higher prices to compete with international buyers for U.S. crude.

“We don’t think the current system needs to be changed,” said Bill Day, a spokesman for Valero Energy Corp. “The United States is still importing quite a bit of crude oil to satisfy our needs.”

Net U.S. crude imports were 7.16 million barrels per day as of June 13, down 24 percent over the last five years, according to data from the EIA.

The decision to allow a wider category of lightly processed oil provides a stronger base to argue for broader approval of crude exports, said Lipow, the Houston oil consultant.

“There’s cracks in the crude oil export dam,” he said.

–With assistance from Eliot Caroom and Christine Harvey in New York and Lananh Nguyen in London.

Copyright 2014 Bloomberg.

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