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Eroding the US Crude Export Ban

Topics: Onshore Shale oil

Booming US oil production is beginning to seep into international markets despite the country’s ban on oil exports. One sign of change was the departure in late July of a tanker from Texas City, Texas, with 400,000 bbl of liquid hydrocarbons bound for Asia, Reuters reported.

The condensate on board the BW Zambesi skirted around the crude export ban because a large gas processing company convinced regulators that it was exporting a refined product, and there is no limit on that. Regulators agreed with the argument offered by Enterprise Products Partners that since distillation was used to process the production, which is rich in natural gas liquids, it had been refined, the Wall Street Journal reported. This could open the door to more such sales because what can be coaxed out through fractures in extremely tight rocks tends to be light hydrocarbons that go through similar processing.

This could open the door to more exports because what can be coaxed out through fractures in extremely tight rocks tends to be light hydrocarbons that go through similar processing. Meanwhile, the subject of US crude exports has become a point of discussion in both the industry and political circles. Oil producers want to export because the high quality oil they produce sells in the US for less than the world market price, while US refiners, chemical plants, and others benefit from the low-cost supply and would prefer to see the ban stay in place.

Politically, crude exports run counter to the popular notion of energy independence in the United States, which has seen oil imports shrink from 60% of US oil consumption in 2005 to 30% currently.

A recent report from energy consulting firm IHS concludes that limiting exports would reduce investment in unconventional production. Without international sales, investment will be suppressed by price discounts that run as high as 20% under global market prices. Demand for US produced light crude is limited because it is often a poor match for the many domestic refiners set up to process heavy grades.

“As a result of the boom in tight oil production, the US is exceeding its capacity to process that type of crude. Current export restrictions mean that light crude has to be sold at a sharp discount to compensate for the extra cost of refining it in facilities that were not designed for it,” said James Fallon, an IHS director who coauthored the report with Kurt Barrow, vice president for downstream energy at IHS.

IHS said US oil exports would allow producers to earn a higher price, leading to greater domestic oil production— from 8.2 million BOPD to 11.2 million BOPD in 2022. This growth projection assumes that US exports will only slightly lower the value of crude on global markets. It predicted US crude exports would find ready markets in Europe and Asia, which now rely on Africa and Russia. Oil from those regions may be re-oriented to Asia.

If oil exports are tightly restricted, IHS predicts that US daily production will drop by more than 1 million BOPD because of reduced investment.

IHS’s point of view runs counter to the one offered by users, such as refiners on the east coast of the US who now depend on the light crude delivered by train from the Mid Continent, or chemical makers who are investing billions in new facilities to take advantage of the growing supply of low-cost hydrocarbons.

Oil export restrictions were implemented in the 1970s. They have drawn little notice because US crude production fell steadily from 1970 until 2008, when shale production kicked in.

“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.”

Eroding the US Crude Export Ban

Stephen Rassenfoss, JPT Emerging Technology Senior Editor

01 September 2014

Volume: 66 | Issue: 9

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