US Takes Notable Step to Lifting Crude Export Embargo

Edited by Vani Rao

Commerce Department allows two companies to export oil condensates

In a surprising yet cautious move, the US government has taken a notable step towards lifting the ban on oil exports from the country. According to The Wall Street Journal and Reuters reports on Tuesday, June 24, 2014, the US Commerce Department has permitted two Texas-based companies, Pioneer Natural Resources (NYSE: PXD) and Enterprise Products Partners, to export oil condensates to foreign buyers. The two companies have been allowed to export about 20,000 barrels a day of condensate exports as of now. The shipments could begin as soon as August and could pave the way for a change in the US government’s stance on its existing energy policy.

Oil Rush

The existing US energy policy does not permit oil companies to export crude since the Arab oil embargo of the early 1970s. The embargo caused oil prices to quadruple and led to rationing at gas stations across the US, prompting oil & gas companies to increase domestic production. While the US does not have much of proven reserves, it was the largest importer of crude oil in 2013.

Source: EIA
Source: EIA

 

Source: EIA
Source: EIA

The search for indigenous oil drove drilling companies to tap shale rock formations across the US. In recent years, many oil companies struck oil in most of these reserves. In the Bakken region in North Dakota, most of the oil production has been light. In the Eagle Ford in south Texas, about 70% of the oil falls under the category of condensates, another name for ultralight oil. This increased the production of ultralight oil to such an extent that it resulted in a glut, causing prices to fall by $10 or more below that of traditional crude over the past few months. Miffed by the falling prices of ultralight oil, producers have asking for the export ban to be removed since they could get a higher price from foreign buyers than US refiners.

According to the Energy Information Administration (EIA), between 2011 and 2013, US oil output soared by 1.8 million barrels a day, with 96% of new production in the form of light or ultralight oil. The graph below shows the projection for US crude production until 2040. In March 2014, US crude oil production stood at 8.2 million barrels a day, as per EIA data.

Source: EIA
Source: EIA

 

Source: EIA
Source: EIA

 

Oil producers cry foul

In 2013, the US field production of crude oil stood at 7,443 thousand barrels per day, according to the EIA. Pioneer Chairman and Chief Executive Scott Sheffield has been one of the most outspoken advocates for oil exports. However, he warns that refiners along the Gulf Coast could face a glut with too much shale oil. Supporting his stance is Harold G. Hamm, CEO of Continental Resources Inc., the biggest driller in North Dakota. Many members of Congress, though, are likely to resist a broader change in the export policy, mainly because average US gasoline prices are inching toward $3.80 a gallon as shown below. This is mainly on account of the political unrest in Iraq.

Source: EIA
Source: EIA

Projects in the pipeline

Not helping matters is the fact that there are nearly 20 refining projects in the US with capacity of more than 900,000 barrels a day in the proposal stage and are in various stages of development. Later this year, Kinder Morgan Inc. plans to start a $360-million condensate splitter near the Houston Ship Channel that is supported by long-term contracts with BP PLC. Most of these projects are supported by long-term supply contracts; hence, these companies are lobbying for the lifting of the oil export ban and a definitive liberalization of the government’s oil export policy to gain more from indigenous production.

The new energy reality

For now, it seems that the US is faced with high domestic production in a scenario where there is a huge global crude demand-supply gap that is leading to higher prices. Many US refineries are not designed to handle condensates and are not willing to invest billions to recalibrate their refineries. Producers such as Pioneer, which are getting lower prices for their oil because domestic refineries cannot process it, would definitively benefit from the change in the export policy. For now, exports of condensates are seen as baby steps in the long-drawn lobbying for a change in the existing energy policy, a risk that oil producers are willing to take.

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