Testing US Oil Export Ban Carries Risks

Maritime Activity Reports, Inc.

November 6, 2014

Companies eager to export U.S. oil face fines and other risks if they stray from government-approved practices, trade lawyers said this week, but the challenge is figuring out what the government allows because its rulings have so far been private.

As the drilling boom floods the Gulf Coast with light oil that local refineries cannot easily process, energy companies are under pressure to sell the petroleum to global markets, despite a 40-year ban on crude exports. A 20 percent drop in oil prices this fall has also made them anxious to find new buyers.

The Obama administration this summer put a hold on more than 20 new applications for exports of minimally processed light oil called condensate after issuing two approvals for the fuel. That has pushed companies to consider exporting condensate without specific governmental approval.

The Commerce Department's approvals to Pioneer Natural Resources Co and Enterprise Product Partners LP this year were issued as private letters, which makes it hard for other drillers to discern exactly what petroleum the government considers legal.

But the general parameters require oil producers to put the condensate through a distillation process for it to be considered a petroleum product like gasoline or heating oil. Products, unlike crude, are exempt from the ban that Congress passed after the Arab oil embargo of the 1970s.

"It's very unlikely that a company going to that kind of effort, actually having light condensate run through a distillation tower ... would be getting whacked with any major penalty," said Alan Dunn, a trade lawyer at Stewart and Stewart.

BHP Billiton Ltd said this week it had determined that its condensate meets the legal criteria for export as it is similar to the shipments the Commerce Department has approved. The Anglo-Australian mining company has contracted to a sell a cargo of the oil to Swiss trader Vitol.

Friendly Congress
U.S. midterm elections this week put Republicans in control of both houses of Congress, an outcome many expect to hasten measures that would relax or end the ban on exporting crude.

But nobody expects Congress to act soon. Condensate producers wishing to export now "must engage in strict due diligence to ensure compliance with rulings" by the Commerce Department, another lawyer said at an off-the-record workshop on condensates at the U.S. Energy Information Administration in September.

For example, if the feedstock is too heavy to be considered condensate, if the distillation process is too light, or if the finished condensate is not kept separately from other crudes before it reaches the shipping vessel, a company could face a civil fine from the Commerce Department.

A civil fine could be twice the amount of the transaction, Dunn said. It could be mitigated, and perhaps reduced to a warning letter, if the producer had gotten a legal opinion that it was not outside the boundaries of the export ban.

The fine also could hurt the company's reputation, as end buyers are wary of legal risks to suppliers.

A far worse legal problem would develop if a company strays from what the Commerce Department approved and mixes condensate derived from oil wells into similar petroleum that comes from natural gas fields, and tries to get away with it, Dunn said.

"That's a crime" that could also mean action by the Justice Department, jail time and million-dollar fines on top of the civil penalties, he added.

But as long as companies are trying to mirror what has been approved, they should be safe, said a Washington-based trade lawyer who requested anonymity due to the sensitive nature of oil exports.

"To the extent companies are shipping the exact same stuff that has been approved," the lawyer said, "... they would have a pretty strong legal argument that this is none of the Commerce Department's business."

(Reporting by Timothy Gardner; Editing by Jessica Resnick-Ault, Alan Crosby and Lisa Von Ahn)

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