Redefining Refining & U.S. Government Policy: Analysis

By George Backwell
Monday, June 30, 2014
US Crude Oil Production by Grade: Source Poten/EIA

A recent WSJ article and BIS permits raise questions and highlight the debate as to what constitutes processing, or refining, or manufacturing, which would make certain hydrocarbon streams to be eligible for export. Poten & Partners explore further in their latest 'Poten Tanker Opinion' as follows:

This week’s kerfuffle was prompted by a Wall Street Journal (WSJ) article that boldly claimed:

“The Obama administration cleared the way for the first exports of unrefined American oil in nearly four decades, allowing energy companies to start chipping away at the longtime ban on selling U.S. oil abroad.”

Well, that’s one way to sell newspapers. While not entirely true in the way the WSJ would have one believe at first blush, the express permission via a Private Letter Ruling by the Department of Commerce Bureau of Industry and Security (BIS) that grants two companies, Pioneer Natural Resources Co. and Enterprise Products Partners LP, the ability to export stabilized condensate does raise some existential questions.

The grey area results from the apparent catchall definition of condensate. Condensate is a petroleum liquid defined by an API gravity range (50-55°, up to that of NGLs) that is generally painted in two broad strokes: plant condensate or lease condensate.

The BIS defines lease condensate as crude oil, and as such, it is subject to export restrictions. Lease condensates are often stabilized at the extraction site in order to remove some of light ends. Plant condensate, on the other hand, is separated from natural gas when it is removed at a gas processing plant.

In a nutshell, the WSJ article and BIS permits raise questions and highlight the debate as to what constitutes processing, or refining, or manufacturing, which would make these hydrocarbon streams to be eligible for export.

Many companies have already been investing in condensate splitter capacity to do just that. By lightly processing ultra-light crude oils or lease condensates, the material can then be exported. Does the BIS precedent then make these projects for naught? It is tough to say at this point.

The 40-year ban on exports that is referenced by the WSJ applies to crude oil. According to the BIS US Code Title 15 CFR 754.2, “ ‘Crude oil’ is defined as a mixture of hydrocarbons that existed in liquid phase in underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities and which has not been processed through a crude oil distillation tower. Included are reconstituted crude petroleum, and lease condensate and liquid hydrocarbons produced from tar sands, gilsonite, and oil shale. Drip gases are also included, but topped crude oil, residual oil, and other finished and unfinished oils are excluded.”

As many people are aware, there are exceptions to the rules. The US regularly exports crude oil to Canada, as permitted through export licenses, not unlike those recently granted to Pioneer and Enterprise. Additionally, the re-export of foreign oil (read: Canadian barrels) is permitted.

It is reported that there are about 1 million barrels per day of total condensate produced in the United States; about 640 kbd is the unmanufactured lease, or field, type. The EIA estimates that crude oil production for the API 45° and higher will see the highest proportional growth rate over the next two years, see Fig. 2. [reproduced here].

Poten's conclusions
The takeaway from this is twofold. One, this could be the first real inkling of Washington getting real hip to the ability of producers to find ways around arcane regulations and two, a multi-billion dollar industry could potentially change overnight with the stroke of a pen.

For shipowners, this throws one more wrench in a slowly turning policy wheel. While an actual reversal in the export ban is very unlikely before the mid-term elections in November, these developments should be taken seriously.

The public reaction, seemingly muted at the moment, may suggest that crude oil exports are more palatable than was historically assumed. Regardless, the highly politicized nature of the petroleum markets in America make long-term betting on structural trade flows, and the shipping sectors that support them, risky business.

Source: Poten & Partners


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