It happened on July 23, 2014. The tanker, BW Zambesi, left Houston for Asia with 400,000 barrels of condensate owned by Pioneer Natural Resources onboard, and with that, hopes among US oil companies seeking relief from a decades-long ban on crude oil exports were renewed.
The condensate, which is essentially a type of ultra-light oil, was sold by Enterprise Products Partners to Mitsui & Company of Japan, with the approval of the Bureau of Industry and Security (BIS), an office of the US Department of Commerce.
Since the 1970s, the US Congress has outlawed the export of US oil without a license, except from Alaska's North Slope and the Strategic Petroleum Reserve. The policy, which was imposed after the Arab oil embargo, was meant to protect US oil from leaving the country. Since then, every known license granted has been limited to exports to Canada.
Splitting legal hairs
The exception granted to Pioneer and Enterprise was based on a legal "interpretation" of the law. Attorneys for the two firms argued that certain equipment, used to treat pipeline oil for shipment, effectively removed enough volatile components from the oil to classify it as an exportable fuel. Specifically, they demonstrated that oil passing through a "distillation tower" would effectively produce a product not considered to be crude oil, thereby making it suitable for export.
According to 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.”
Distillation towers, traditionally found at refineries, are often used at the wellhead to "split" lighter hydrocarbon gases, such as methane, ethane and propane from heavier hydrocarbon components, to reduce flammability and stabilize the product for pipeline transport. The cost of these "splitters" can range from $500K to $5M, a fraction of what it costs to build a refinery, making them extremely attractive to oil companies interested in taking advantage of the exception.
The go-ahead received by Pioneer and Enterprise has caused at least 10 other companies to file for licenses under the same ruling, creating a buzz about the industry that perhaps the US might be ready to expand export activities on a grander scale. The BIS states that there has been "no change in policy on crude oil exports." However, the department also said it is "working on industry-wide guidelines that could make it even easier for companies to sell US oil abroad."
On the brink of a breakthrough?
The implications for the industry and US economy are substantial. According to the US Energy Information Administration, US crude oil exports exceeded 200,000 barrels per day in five of the first six months of 2014, most of it arriving in Canada. The rise marks the highest level of exports in 15 years.
With production gains like these, US dependence on imports is shrinking. In 2005, imports filled 60% of demand; as of 2014, they accounted for less than 30%. And, with successful fracking operations expanding the gains, many in Congress are beginning to seek a repeal of the trade limits altogether.
Fracking operations, however, tend to tap large volumes of light, sweet crude, as opposed to the heavier varieties most American refineries are equipped to process. The imbalance is causing producers to push for broader reform, allowing high-value light supply to leave the country, while domestic refiners focus on lower-cost, heavier imports.
Exxon is just one company banging the drum for free trade. With so much crude flooding the market from Texas and North Dakota, oil prices are dropping and a repeal of the ban would open up higher-priced markets for the nation's largest energy producer, among others.
Numbers tell the tale
Today, US crude sells for about $97.50 a barrel, compared to $11 a barrel in Europe. If the ban is lifted, production will increase from 8.2 million barrels per day to an estimated 11.2 million barrels by 2022, as producers take profits on the global market. Conversely, leaving the ban in place will only depress the cost of domestic oil, leading producers to reduce their outputs and investments in response to the increasing discounts.
IHS Global, a leading business analyst covering world energy markets, suggests that lifting the ban on US crude exports could spark investments of nearly $750 billion in domestic production, translating to $86 billion in annual GDP, and nearly 1 million "additional peak annual jobs." A quarter of the additional jobs would be created in states that essentially produce no crude oil.
The report goes on to suggest that permitting US crude exports would increase the supply internationally, driving down not only the cost of crude, but gasoline prices as well. According to IHS, US motorists would save about 8 cents per gallon as a result of free trade, translating to nearly $265 billion in savings between 2016 and 2030.
Preparing for the Best
With so much to gain, regulators and politicians are finding it harder to side with the status quo. Americans generally want more jobs, disposable income and economic growth, not to mention national security through reduced dependence on foreign oil. Relaxing – if not completely repealing – the crude export ban, could mean more for everyone, including oil companies who stand to make a handsome profit off a rapidly expanding global energy economy. At the very minimum:
· Producers should anticipate increased production
· Midstream companies should prepare for expanded operations
· Refineries should seek new efficiencies to handle the increase in demand
One way every energy company can make a giant leap forward, without betting the farm prematurely, is to re-examine their trading and risk management systems.
Trade reporting is going to change
If the ban is lifted, traders at all the majors will begin exporting, and that will require changes to the way trades are reported. As condensate flows from the wellhead, through transportation and storage and onto the final sale, shipments will need to be tracked and reported according to international regulations.
That will require risk management software that integrates the physical and financial processes, with an eye to meeting different compliance regimes. Specifically, it will need to manage crude, NG and NGLs from the wellhead to the final point-of-sale, manage physical and financial transactions, trace all modes of transport, and finally calculate complex netbacks, deducting the sales price all the way back to the wellhead for any commodity.
While it’s arguably too soon to make new IT investments, beginning the due diligence process in anticipation of the ban’s removal should begin now since a regulatory solution for energy trading and reporting is generally not a stand-alone application. It’s also vital to consider whether you’ll install software on a captive system and maintain it internally, or purchase a software-as-a-service (SaaS) contract and maintain it in the cloud.
Considering the transformational impact shale has had on the economy, crude oil exports could mean phase II of the ongoing US energy renaissance. It is essential to be ready with a solution that will allow you to upgrade and manage your compliance and reporting processes quickly.
Michael Hinton is Chief Customer Officer and Senior Vice President, Products and Solutions for Allegro Development Corporation.