Testing U.S. crude oil export ban with swaps no simple matter

BY VALERIE VOLCOVICI

(Reuters) - Oil producers considering swapping U.S. light crude abroad for the heavier imported oil needed by refiners to work around a decades-old ban on exporting domestic crude may find the strategy harder to execute than it looks on paper.

As U.S. production of light crude oil continues to boom, some companies and lawmakers are calling for the United States to reform its decades-old ban on most U.S. crude oil exports - a policy that followed the Arab oil embargo of the 1970s.

A breakthrough arguably came this week, when U.S. officials clarified that a type of ultra-light crude known as condensate could be exported after enough processing to qualify as a refined product, exports of which are allowed. Swaps would be another way to test the ban's limits.

In theory it should take just weeks for Washington to allow oil producers to execute a deal, since these swaps are allowed by law. But analysts say meeting the base requirement - that the imports be of the same quantity and quality as the exports - is easier said than done.

The current law does not clearly define quality - for example, whether a heavier crude such as the kind Mexico produces is of higher quality because it is compatible with U.S. refining capacity, or lower quality because of its density.

"Ensuring that crude swapped in is of the same quantity and quality as crude swapped out, which is a loose paraphrase of one of the regulation’s many stipulations, may be non-trivial," said Kevin Book, policy analyst at ClearView Energy Partners.

The Commerce Department's Bureau of Industry and Security, which oversees exports, has received at least one application for a permit to export crude through a swap deal, Reuters has reported.

Earlier this month, Continental Resources confirmed it has applied for a license for a swap "to further demonstrate the need for a free market for crude." The largest leaseholder in the booming North Dakota Bakken region did not disclose with which country it intends to swap.

Current law says U.S. oil can be exchanged in similar quantity "with persons or the government of an adjacent foreign state" or temporarily exported across parts of an adjacent country, and then reentered into the United States.

Adjacent countries could include Mexico and Panama, according to a BIS official.

U.S. regulations allow a swap of oil exports for imports only if the home-grown product cannot be marketed domestically for “compelling” economic reasons.

Analysts said that if a company makes a strong enough case about the negative economic impacts of excess crude oil production within the United States, approval could be relatively fast.

“If someone put in the right application that said ‘I’ve got a distressed crude oil, it’s a widget that no one needs and its backing up on production’…I would bet they would get an export license,” said Frank Verrastro, chair for energy and geopolitics at the Center for Strategic and International Studies.

Export backers said dislocations in supply will increase in the coming months and years as production from the Bakken and other plays, ill-suited to current refining needs, continues to rise.

North Dakota this month passed the one-million-barrel a day mark in crude production, the state's petroleum council said on June 17. In 2000, the state produced less than 100,000 barrels of oil per day.

SWEET AND SOUR

U.S. Senator Lisa Murkowski of Alaska, the top Republican on the Senate Energy Committee, has pushed for ending the export ban, citing a range of benefits that would flow to the United States.

Last month Murkowski issued a staff report saying swaps of light sweet crude to nearby countries would be one way to shrink a glut of that type of oil within U.S. borders.

"Exchanges cannot solve the mismatch between refineries geared to process heavy crudes and record production of lighter grades of petroleum, but they would be a partial measure," the report said.

U.S. Energy Information Administration chief Adam Sieminski has said that the domestic excess of light sweet oil and Mexico's excess of heavy sour oil offered an opportunity.

Sieminski said in May that the EIA has no immediate plans to study the option, but that companies and refining consultants should explore whether it makes economic sense.

"Mexico, I thought, was an easy one because they are right next door, but other countries in Latin America may also be suitable candidates – Venezuela would be one," Sieminski said.

Still, not all experts see swaps as a simple way to get around the export ban.

ClearView's Book said that for various reasons there is probably only a narrow range of price spreads between U.S. and Mexican crude that could make a swap worth doing.

And Amrita Sen, chief oil market analyst at Energy Aspects, said it is "cumbersome" to prove that the U.S. economy will be better off with swaps and that producers would not be able to sell the light crude domestically.

Physical limitations could also make it difficult for U.S. companies to justify swaps with some of the most likely prospects, including Mexico and South Korea, she said.

Culled from http://www.reuters.com/

U.S. allows condensate oil exports, after light refining

By Valerie Volcovici and Timothy Gardner

(Reuters) - U.S. officials have told energy companies that they may export a variety of ultra-light oil if it has been minimally refined, an apparent marginal loosening of a decades-old ban on selling U.S. crude abroad.

The U.S. Department of Commerce's Bureau of Industry and Security told Pioneer Natural Resources Co that putting light oil, known as condensate, through a stabilizer was sufficient processing to qualify it as a refined product, eligible for export without a license.

"The stabilization process at Pioneer's Eagle Ford Shale central gathering facilities involves a distillation unit that lowers vapor pressure and removes volatile lighter hydrocarbons," Pioneer said in a statement. This process qualifies the crude as a product that can be exported, Pioneer said.

The Wall Street Journal previously reported that the Department of Commerce, which has come under growing pressure to ease restrictions amid a resurgence in domestic production, had given approval via a private ruling to Pioneer and Enterprise Product Partners LP to export the so-called condensate. Enterprise didn't respond to requests for comment.

A Commerce spokesman did not comment on the specific rulings but told Reuters that there had been "no change in policy" toward crude oil exports, a topic that has emerged as one of the most contentious energy policy issues this year.

Condensate may be exported if it has been run through a distillation tower, a type of refining unit, because the process "results in the crude becoming a petroleum product (that) is no longer defined as crude oil," said Commerce spokesman Jim Hock. Refined products such as gasoline and diesel are not restricted.

"Existing statutes provide both specific restrictions and allowances regarding crude oil exports," Hock said. Some energy experts also agreed that the ruling appeared consistent with existing interpretation of the 40-year-old law.

Still, U.S. oil prices rose more than $1 to $107.05 a barrel after the report, highlighting the intensifying scrutiny of a gray area in regulations that prohibit export of condensate that has been produced directly from an oil field but allow it if the same type of oil emerges from a natural gas plant or a refinery.

ASIAN BUYERS

Energy-hungry Asian countries, which get most of their oil from the Middle East, would welcome extra U.S. supplies. Three new condensate splitters, a type of refinery, are due to open this year in the region able to process a total of 350,000 barrels per day.

Some oil traders in Asia, however, predict it will be a few years before U.S. supplies hit the market, given the time needed to pin down details such as specifications and freight costs. Reuters reported in May that U.S. oil producers, including Pioneer, had met with the Department of Commerce's Bureau of Industry and Security (BIS), which oversees exports, and were hopeful of some form of easing on condensate limitations.

The U.S. shale oil boom of recent years is expected to soon make the country the world's top crude producer, surpassing both Saudi Arabia and Russia. It has also led to a glut of light oil in Texas and Louisiana that is difficult to process there because refiners have invested billions of dollars to process heavier oils from Mexico and Venezuela.

Some ultra-light oil could be reclassified as fuel after it has been minimally processed, putting it in a regulatory gray area that has been seen by some export backers as a way to ease the ban on exports.

Senator Lisa Murkowski, a Republican from Alaska, said the move on condensate was "a reasonable first step that reflects the new reality of our energy landscape."

Murkowski, the top Republican on the Senate Energy Committee, urged the White House to fully lift its ban on crude oil exports.

A Senate aide said the shipments that will be allowed are limited because they are "stabilized" condensates, or crude that has been processed to remove light ends like butane gas so that it can be sent through pipelines for shipping.

It was not immediately clear how much condensates the companies would be able to ship though exports could begin as soon as August. Pioneer Chief Executive Officer Scott Sheffield said in March that recent U.S. oil production includes some 800,000 barrels per day of condensate.

Congress is not expected to pass legislation lifting the ban on crude exports before the Nov. 4 elections, as no lawmaker wants to be blamed for a move that could boost U.S. oil prices.

Senator Edward Markey, a Massachusetts Democrat, blasted the export approvals saying it puts America on a "slippery slope" to send more oil abroad when the Middle East is in disarray and tensions are high with Russia.

"Congress put this oil export ban in place. It should be Congress that decides when and how to change it, not through a private ruling by the Commerce Department without public debate," he said. (Reporting by Ros Krasny, Timothy Gardner and Valerie Volcovici; Editing by Sandra Maler, Cynthia Osterman, Lisa Shumaker, Jessica Resnick-Ault and Lisa Von Ahn)

Culled from http://www.reuters.com/