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By Robert Rapier on Sep 30, 2014 with 10 responses

US Crude Oil Exports Headed to South Korea

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.

Link to Original Article: US Crude Oil Exports Headed to South Korea

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By Forrest on October 1, 2014 at 9:35 am

    Add to the marketplace confusion, I was listening to investment talk show whereupon they said the oil glut per U.S. production resulted in all oil tankers floating about globe with storage for hope of higher future price. Also, ISIS was selling Syrian crude for as cheap as $30/barrel on black market. This isn’t good news as U.S. was all set to cash in on crude oil pumping. We need the money for economic stimulation and pay down of dangerous debt.

    First, I will suggest to environmental groups; citizens will frown upon your venture to hurt U.S. businesses operations and job killing / economy killing shenanigans. It’s not fun to collapse the economy per environmental improvement despite what the professor claims. The marketplace is way to complicated and dynamic for D.C. control or manipulation. Sure, oversight per fair competition and improve ability to maximize competition are all good endeavors, but not control. BTW, this explains one reason why E85 prices are so incredibly low as they sometimes use natural gas for the once most expensive part. Ethanol has such low vapor pressure they can use the fuel.

    Question: You stated once the opportunity lost per U.S. pumping national oil treasure back when the stuff was dirt cheap. No conservation in place to improve future value. Are we doing the same thing? Should we develop a national conservation program per normal interest of country? Meaning a plan of action to make best use of valuable resource to the point of helping the future of oil companies. This may result in petrol lightening up the attack on ethanol. Also, stabilize economics for U.S. oil companies. Maybe we should work together to maximize oil company profit over the long run?

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    • By Forrest on October 2, 2014 at 9:41 am

      So many natural resources today are regulated to prevent over consumption. Most are renewal resources such as game, woodland, and fish. Wouldn’t this make even more sense per harvesting nonrenewable resources. It would be difficult to avoid the ever present politics of nationalizing the resources, that always ends badly, but our national politics appears to be more than capable of bad decisions. It would have to be simple, fair, and consistent. Give ample time for corporations to adjust to production schedule. Maybe more of a national strategy that would align with business interest for maximizing value of national resource. Always achieving top dollar per storage and selling to quell disruption. Be more adjustable and unscheduled per international reliance or strategy to beat or manipulate. Frustrate the Cartel per ability to wait for opportunity. That strategy probably makes the most use of oil product exports and avoidance of national consumption as the local production of biofuel, biomass, natural gas, and the rest of home grown energy probably better consumed locally. We can be still amplify the petrol business and gain much business trade in doing so.

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      • By jcsr on February 13, 2015 at 1:18 pm

        Wow! Forrest for President!

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  2. By Russ Finley on October 1, 2014 at 11:57 pm

    This may be a dumb question, but why do we ban exports of crude? Won’t the market decide when it is more profitable to import or export?

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    • By Robert Rapier on October 2, 2014 at 12:56 am

      Politics.

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      • By Forrest on October 2, 2014 at 9:17 am

        The politics of national crisis are always to alluring as the act will always increase power and popularity. Modern day politics have learned to exploit such historical and rewarding antics. These people are intelligent, well informed, and educated yet they will shamefully exploit the naivety of population to gain power. It would be sad to think our modern educational system has failed so miserably, that majority of citizens think banning exports good for the country upon need? But, the contrary viewpoint would be that citizens only support their politics and don’t care of independent thinking even if the suspect the action would hurt the country. I guess this viewpoint can be summed up the end justifies the means. These forces are alive and well in modern economies. Also, modern politics work to make crisis or allow crisis, meaning not so bad if the country suffered per preventing any improvement until power can be harvested per national solution. This is the course of history, unless leadership can convince the majority to support change.

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      • By Russ Finley on October 8, 2014 at 10:00 pm

        Is it possible that this law has no economic advantage even in times of oil embargo?

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      • By Layni Shepherd on October 23, 2014 at 9:07 am

        Robert
        it has very little to do with politics in a small p you should know this. It is
        very simple, we ban the crude oil exports for the big NS. National Security. It
        is a very simple answer, to a long convoluted lack of innovation in the field
        Energy for the last 40 years. The USA is the largest consumer of crude, we have
        the largest military, we have the largest dependency on oil. If we sell it, its
        gone, if we lose it, it will never come back, Russ Finlay asked a simple
        question of whether the market decides ? obviously not. There are very few net
        exporters of oil, that is why OPEC has been so powerful, everyone else are net
        importers of oil, especially us the USA. If we get rid of our valuable resources
        today, for today’s consumption, we run the risk of larger political turmoil’s in
        the future. At best estimates with Bakken and Eagle Ford we have found 20 years
        more supply before depleted field make it uneconomical to remove, so we are back
        to square one of dependency overseas. In short everything is to do with
        politics, but its a very important issue in politics that has stopped us
        exporting our crude.

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        • By Forrest on October 23, 2014 at 4:46 pm

          Let me throw something in here. Export bans are inefficient and crude controls. I agree with what you post, just not with the remedy as hard core regulations are corrosive. Meaning they are blunt instruments and savage business subtle decision making per restricting ability of business to accomplish efficient operations. They are politically popular as easy bait for voting public and offered as easy fix. History a study that would inform otherwise. We could ban Ford exports and achieve great price and supply of Fusions. I know an over simplification, but you get my point. What you are concerned with is old fashioned conservation, much like controlled harvest of fish and woodland. Conservation always works to the advantage of the industry and society needs. Fishermen complain, but they catch more fish and get a better price and can do so for a very long time.

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          • By Forrest on October 24, 2014 at 5:54 pm

            Another thought, what example do we present to Chinese whom own just about all the lithium for battery car? Would they benefit per regulations to ban exports of this element as this rare element controls the fate of BEV? If the car is the solution to low polluting energy needs, why wouldn’t China ban exports of such a valuable resource? This thought process is a magnitude higher than U.S. oil export. The reason….everyone within the industry benefits if they cooperate and maximize the ability of the technology. Going alone is a bad idea as well as regulating roadblocks to domestic energy production. IOWs best to stimulate international competition of best use of resources than slamming the door shut to play with your own marbles. IOWs best not to vote to empower politics that basically slam the door and say I want what your have. Jimmy Carter invented the oil ban as a easy diversion to his incompetent energy policy. He took the spot light off his bad decision making. The same happen upon Roosevelt years of horrible economic decisions. He went popular with excess federal spending and hammered business as the culprit. He invented easy money politics and to this day the political ramifications of his tenure may very well cork screw our country to the likes of Valenzuela. Unfortunately, this is the normal course of human events, just protect yourself by intelligent voting and enlighten others. This country is the last great hope of governance as usual.

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