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U.S. Crude Oil Exports Headed to South Korea

Crude Oil Exports

The Ban on Crude Exports

One of the 2014 predictions that I made back in January was “The crude oil export ban will not be lifted in 2014.” The present ban on US crude oil exports dates to the The Energy Policy and Conservation Act (EPCA) of 1975. The act effectively bans crude oil exports to all countries except Canada. The export of refined products, such as gasoline, diesel, and jet fuel is allowed.

But given that the US is still a net importer of crude oil to the tune of ~5 million barrels per day (bpd), on the surface it seems silly to entertain the notion of exporting crude oil. The problem essentially comes down to the location of the crude being produced, and the configuration and location of US refineries. Prior to the shale oil boom, crudes processed by refiners had been getting heavier and more sour (i.e., contained more sulfur). As a result, refiners had invested heavily in equipment that could process these types of crudes.

Enter the shale oil boom, which has been producing ever-greater volumes of light, sweet crude since 2008. There is a limit to how much of this crude can be processed by refineries that have been configured to process heavy, sour crudes, and as a result some areas of the country are oversupplied with lighter oil. This in turn has led to discounts — sometimes very large — of light, sweet crudes relative to heavier crudes that are internationally traded.

The oil industry would like to address these local oversupply situations of light domestic crudes by overturning the crude oil export ban. I predicted that this would not happen this year, because I can’t see an administration that has stalled for six years on the Keystone XL pipeline expansion being in any hurry to overturn the export ban. Further, serious discussions of repealing the ban would likely generate the sort of resistance from environmentalists that the Keystone XL pipeline did, which would further encourage the Obama Administration to kick that can down the road. Given the Keystone XL delays, it is hard for me to imagine that the export ban will be overturned during the current administration.

However, there have been a couple of developments this year that many see as chipping away at the ban.

Chipping Away at the Ban

The shale oil boom has been accompanied by a shale gas boom. There are liquid hydrocarbons that are produced along with natural gas. Lease condensate, or simply “condensate”, refers to hydrocarbons that exist as gases at the high temperature and pressures of natural gas inside the earth, but that condense into liquids at normal temperatures and pressures once lifted. This condensate consists primarily of longer chain molecules such as pentane and higher, and is sometimes called natural gasoline. Further processing of condensate to remove remaining methane and ethane to make it more easily stored and shipped is called stabilization, and the product is called stabilized condensate.

It was unclear whether stabilized condensate fell under the crude oil export ban, so the US Department of Commerce was asked by Pioneer Natural Resources (NYSE: PXD) and Enterprise Product Partners (NYSE: EPD) to rule on the issue. The Department of Commerce ruled that stabilized condensate is a refined product rather than crude oil, and thus could be exported. Some analysts argued that this further opened the door to the full blown repeal of the export ban.

But now an actual shipment of crude oil is in the process of being exported.

US Crude Oil Bound for Asia

In addition to the exemption for Canada, and now the clarification over the export of stabilized condensate, there is one other exception to the export ban. In 1996 President Bill Clinton signed legislation that allowed the export of Alaska’s North Slope (ANS) crude. Following the passage of the legislation, ANS crude exports to Asian countries climbed to ~44,000 bpd. But these exports ceased in 2004, as ANS production declined, and the ANS produced in excess of Alaska’s needs has been primarily shipped to the US West Coast.

But crudes from the Bakken area of North Dakota have been finding their way to the West Coast, in turn reducing the demand for ANS. This has resulted in deepening discounts for ANS crude, which were worsened by the shutdown of a Flint Hills Resources refinery near Fairbanks that had consumed nearly one-sixth of ANS output. These discounts have now become significant enough relative to the price of crude in Asia that last week the Polar Discovery, a tanker owned by ConocoPhillips (NYSE: COP), left Valdez, Alaska with a crude oil shipment bound for South Korea. This marks the first export of crude oil from Alaska since exports dried up in 2004.

Conclusions

ConocoPhillips is the largest crude oil producer in Alaska, and has stated that additional shipments will be dictated by the market conditions and tanker availability. ExxonMobil (NYSE: XOM) and BP (NYSE: BP), two other major crude oil producers in Alaska, are both also reportedly considered exporting crude to Asia.

Whether crude exports from Alaska begin to happen regularly will depend on the differentials between ANS and the price of oil in Asia. Affecting this will be a number of factors, including the future direction of Alaskan and Lower 48 oil production. In recent years, Alaskan production has been declining, but Alaska recently passed a law that should result in greater investments into Alaskan oil production. Should this result in a reversal in Alaska’s production decline, odds are high that exports to Asia will increase.

Photo Credit: U.S. Crude Oil Exports/shutterstock

Robert Rapier's picture

Thank Robert for the Post!

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Discussions

John Miller's picture
John Miller on Oct 3, 2014 3:11 am GMT

Robert, ConocoPhillips split into Conoco (Upstream production assets) and Phillips 66 (Downstream Refining assets) recently and is no longer a major integrated Oil Company like XOM and BP.  Since Conoco no longer has the Phillips 66 Refining assets in WA and CA that process large volumes of ANS crudes, their motivation to export this crude is pretty obvious; increased profit margins.  Since the West Coast (PADD V) imports 1.3 MBD of crude and petroleum oil and almost half of these imported crudes come from the Persian Gulf, allowing ANS exports is very inconsistent with U.S., and in particular, West Coast Energy Security.  Re. my recent post on the subject.    

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