U.S. loosens old ban on oil exports, adds outlet for shale flow

Cows graze near a reclaimed natural gas drilling site with condensate tanks in Washington County, Pa., in this file photo. A Commerce Department decision to change its definition of refined product means more of the oil from U.S. shale formations may be eligible for export.
Cows graze near a reclaimed natural gas drilling site with condensate tanks in Washington County, Pa., in this file photo. A Commerce Department decision to change its definition of refined product means more of the oil from U.S. shale formations may be eligible for export.

HOUSTON -- The Commerce Department has opened the door to more U.S. oil exports as long as the crude is lightly processed, tempering the impact of a law that's banned most overseas petroleum shipments for the past four decades.

The department widened its definition of what's traditionally been considered a refined product eligible for shipping to customers abroad. That means more of the oil being pumped from U.S. shale formations may be eligible for export after being run through small-scale processing units.

The Commerce Department issued its ruling after Pioneer Natural Resources Co. petitioned for approval to export a type of ultralight oil that had been stripped of lighter gases to make it less volatile for transport -- a minimal level of processing known as stabilization. The ultralight oil, known as condensate, has been abundant in shale formations during the drilling boom, leading to oversupplies on the Gulf Coast.

"It's a crack in the door which has otherwise been shut for 40 years," Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London, said by phone. "If approvals for condensate exports are extended to more companies, it'll benefit U.S. producers and processors in Asia, particularly in Singapore and South Korea."

Any oil that has been processed through a distillation tower -- a preliminary form of refining -- is no longer defined as crude oil and is therefore eligible for export, said Jim Hock, a department spokesman, in an emailed statement.

Pioneer uses a distillation unit to stabilize oil it produces in the Eagle Ford Shale of South Texas, most of which is condensate.

The Commerce Department "recently confirmed our interpretation that the distillation process by which our Eagle Ford Shale condensate is stabilized is sufficient to qualify the resulting hydrocarbon stream as a processed petroleum product eligible for export without a license," Pioneer said in an emailed statement.

"It's not exactly going to be a game changer, but it's certainly the next step in providing the market with some relief," said Robert Campbell, head of oil products research at Energy Aspects, a London-based research firm.

"There are certainly a lot of inexorable economic forces that suggest the U.S. is going to relax the export ban in the long term," Ric Spooner, a chief strategist at CMC Markets in Sydney, said by phone.

Further applications for exports from the U.S. may follow this approval, Morgan Stanley analysts led by Adam Longson wrote in a report Wednesday. If more overseas sales are allowed, U.S. condensate could find its way to Asia, from which companies can produce naphtha used in the petrochemical industry, BNP's Tchilinguirian said.

"A lot of condensate-splitting capacity is in Asia, and more will be added this year," he said. "Some of the Asian processors would have been wondering where the condensate is going to come from."

The U.S. has restricted most crude exports since 1975, in response to the Arab oil embargo. Shipments to Canada are an exception, and those averaged 246,000 barrels a day in March, the highest level since April 1999.

"It is certainly the first step towards the lifting of the ban on U.S. crude exports and will be welcomed by the oil world," Ehsan Ul-Haq, senior market consultant at KBC Energy Economics in Walton-on-Thames, England, said by phone Wednesday. "It comes at a time when geopolitical skirmishes have added more than $10 a barrel of risk premium to oil prices."

U.S. oil producers such as Continental Resources Inc. and ConocoPhillips have been clamoring for an end to the restrictions as shale production has brought a surge in North American petroleum supplies. U.S. crude production has jumped 45 percent since the start of 2012, driven by horizontal drilling and hydraulic fracturing in places including North Dakota and Texas.

While drilling for natural gas has grown in shale formations such as the Eagle Ford and Marcellus, drilling has slowed in Arkansas' Fayetteville Shale in recent years as producers have focused on shales that produce natural gas liquids and oil.

Supplies on the Gulf Coast rose to more than 215 million barrels in May, the highest level on record since 1990, according to Energy Information Administration data. Much of that supply has been in the form of lighter crude and arrived after Gulf Coast refiners made expensive upgrades to their plants to process heavier crudes from places such as Canada and Mexico.

The Commerce Department's willingness to qualify more lightly processed crude for overseas shipments should lead to even wider approval of crude exports, said Sen. Lisa Murkowski, R-Alaska. The decision "is a reasonable first step that reflects the new reality of our energy landscape," she said.

It could also make plans for more complex processing plants, known as splitters, less economical. Several companies are building and planning condensate splitters that are designed to process lighter crudes from shale formations into products like naphtha, kerosene and gasoil, which are eligible for export.

The plants, built for one-tenth the cost of a complex, full-scale refinery, were also aimed at using minimum processing to qualify oil as a refined product for export.

The first of the units, a 50,000-barrel-a-day processing plant built by Kinder Morgan Energy Partners for use by BP, is scheduled to come on line in November. BP has signed a 10-year contract to use the facility, which will be expanded to 100,000 barrels a day in 2015. Several additional plants have been proposed by other pipeline or trading companies, and refiners including Valero Energy Corp. and Phillips 66 said they plan to add similar oil-processing equipment.

Information for this article was contributed by Eliot Caroom, Christine Harvey and Lananh Nguyen of Bloomberg News and Jessica Seaman of the Arkansas Democrat-Gazette.

Business on 06/26/2014

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