Swaps may be a way around US crude export impasse, CSIS forum told

Crude oil swaps may be a realistic short-term alternative to outright repeal of the US crude export ban for US refiners as well as producers, a speaker suggested at a Center for Strategic and International Studies forum.

Federal approval for swaps with Canada and Mexico are easier to obtain because they are immediately adjacent countries, said Martin Tallett, president and founder of EnSys Energy in Lexington, Mass. Mexico’s government recently announced it would seek a second swap of its heavy Mayan crude for light tight US oil, he noted.

“Getting rid of that light crude enables medium and heavy crudes to come in—a sort of swap trade without major refining investments,” Tallett said. US refiners might be more ready to make long-term investments in light tight crude processing capacity if they could get at least 20-year discounts from US producers, he added.

While Europe also might be interested in US light crude to blend with heavier grades, “there’s been a lack of discussion within [the North Atlantic Treaty Organization] about the strategic benefits for the US to supply more light crude to European refineries, particularly as Russia sends more of its light crude east to China,” he said.

Most US refiners aren’t investing aggressively in light crude processing capacity because they previously spent heavily for equipment to handle heavy grades, speakers said. They said outlays of $10-100 million for each new piece of equipment to expand crude units, add overhead systems, and upgrade light ends processing have become common instead.

Some are adding hydrocrackers to get more diesel fuel and less gasoline in response to changing product demand patterns, American Fuel & Petrochemical Manufacturers Chief Industry Analyst Joanne Shore said. Valero Energy Corp. recently spent $1.6 billion for a single unit, Shore said, adding, “We’ve got rid of the easy imports. In 2015-16, refiners are going to cut more into medium grades.”

‘Certainty matters’

Depressed crude prices aren’t making US refiners’ investment decisions easier, said Lynn D. Westfall, US Energy Information Administration petroleum markets analyst. “A refinery project which requires a $7 discount when prices are $100/bbl is more likely to be built than one which requires a $7 discount off a $30/bbl price,” he said. “That’s why certainty matters.”

On Apr. 6, EIA issued a report outlining technical options for more US refiners to process light crudes. The administration will follow this report in May on what they’re likely to do. “Refiners are very good at doing smaller things to increase capacity,” Westfall said. “We’re not seeing $500 million projects.”

Shore said, “Investments today are for the next 3-5 years, and are relatively profitable. We’re not in the risky investment realm. But as refiners look 20-30 years ahead, they think about what’s being done with policies. The circumstances of lower prices and production give us some time.”

US refining nevertheless is where “the rubber hits the road” when it comes to the crude exports debate, according to Frank A. Verrastro, senior vice-president and James R. Schlesinger Chair for energy and geopolitics at CSIS. Optimizing operations both economically and operationally are the main goals, “but all these new investments also trigger [federal environmental] new source reviews,” he said.

“I see this as a debate between incremental policy movements or opening the door,” said Sarah O. Ladislaw, director and a senior fellow in CSIS’s energy and national security program, as she introduced a second panel on crude exports policy. “Should we find little ways to make this more acceptable to policymakers?”

Theodore W. Kassinger, a partner in O’Melveny & Myers LLP’s Washington office who previously was general counsel and deputy secretary at the US Department of Commerce, said, “I don’t expect a predictable incremental set of changes. Lifting the crude export ban isn’t on most people’s lists of Top 5 issues. I expect it to move slowly unless there’s a significant crisis or additional incremental action.”

Environmentalists who oppose allowing more US crude to be exported are making a moral, instead of an economic argument, added Sharon Burke, a senior advisor to the New America Foundation where she focuses on international security who previously worked at the US Department of Defense. “But the demand still is there,” she said. “Other countries could buy crude elsewhere because they need it to keep their economies afloat if we don’t make a decision.”

Contact Nick Snow at nicks@pennwell.com.

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