Contrary to many highly misleading media reports (See here, here, and here) the Obama Administration did not just unilaterally undo several laws that have been on the books for decades, to allow the unfettered export of US crude oil. It’s time to separate fact from fiction and explain some key points.
While crude exports are not banned, in general, US crude oil cannot be exported outside of the US.
There a few exceptions for exports to Canada and for crude produced in Alaska and certain types of heavy California crude. Under certain conditions, the President is authorized to export oil when the national interest is at stake, but as a rule, oil exports are highly restricted.The rules and regulations governing crude oil exports are enforced by the US Department of Commerce’s Bureau of Industry and Security (BIS), which also enforces export restrictions on technologies and goods thought to be in short supply – though the only other such restrictions apply to Western Red Cedar, and to horses exported for slaughter by sea.
However, petroleum products (products made from crude oil) can be exported. Companies that use crude oil as a feedstock to manufacture gasoline, diesel, petrochemicals and the many other goods made from crude oil can export their products overseas. Where does BIS draw the line between a “petroleum product” and crude oil? Well that’s where it gets complicated.
Basically, BIS rules set up a few ways to distinguish non-exportable crude oil from exportable petroleum products. In a nutshell, BIS defines crude oil as liquid hydrocarbons that haven’t been passed through a distillation tower. Here’s where things get really tricky: lease condensates are explicitly included in the definition of crude oil, but plant condensates produced by a refinery are excluded – even though the two substances are often identical! It’s how they were produced that differentiates them: lease condensates were produced from the ground as a raw commodity; whereas plant condensates were manufactured, typically by fractional distillation at a refinery or a natural gas plant.
The BIS didn’t change their rules; they just answered a question they had never been asked before. Earlier this year, two companies with both upstream and midstream assets, independently submitted requests to the BIS under the agency’s standard commodity classification process. In essence, the companies asked the agency to confirm their belief that the products they were making were not subject to the crude oil export restrictions. These types of commodity classification decisions are not public, because they involve sensitive business information. But we now know, thanks to public confirmations from the companies, that the BIS did indeed concur with their interpretations: the products those two companies are producing are “petroleum products” not crude oil, and thus can be exported. Companies secure commodity classification decisions to ensure they are not running afoul of U.S. trade law.
What we know: Pioneer said in a statement that BIS agreed with the company’s interpretation that the distillation process it uses to stabilize certain condensate produced from its Texas wells “is sufficient to qualify the resulting hydrocarbon stream as a processed petroleum product eligible for export without a license.” Separately, Jacob Dweck, an attorney representing Enterprise, spoke at a conference recently where he stated, ”The rulings requested classification of a particular product using a certain type of feedstock, running it through a certain type of distillation technology, and having a certain type of yield.” Dweck added that there must be “significant changes in volume as well as hydrocarbon configuration between the input and output products, as well as the potential uses of output products.”
What we don’t know: For obvious reasons of commercial sensitivity, companies are unlikely to be interested in publicly discussing the specific details of their facilities, technologies or finished products.
What we can deduce: Companies will not be able to export conventional crude oils like West Texas Intermediate or Bakken Blend simply by running them through a condensate stabilizer. If one were to run a West Texas Intermediate crude oil through a stabilizer, what would come out at the end would look a lot like… West Texas Intermediate crude oil. While very light condensate streams may get substantially transformed by a small-scale distillation process, heavier crudes would not – they require more heat and more complex equipment before they will separate and alter their composition – because they have a higher boiling point. Therefore, we can deduce that running crude oil through a distillation column is a necessary but not sufficient step in manufacturing an exportable product. The crude oil must also be transformed from its raw state into a product. We suspect that the BIS will seek to retain its discretion over where that line is drawn in individual instances – like the Supreme Court famously said about “obscenity,” they will know it when they see it.
The upshot: While these decisions may open the door for more processed condensates to be exported overseas, they are unlikely to have a major impact on refinery slates in the United States, nor on the overall abundant supply of crude oil in North America. This ruling will not open any doors for unfettered crude exports. And while some argue we may need to immediately advance a policy of unrestricted exports due to an over saturation of domestic, light crude oil, as addressed in another post on this blog, we are far from the point of such saturation. Utilization increases, crude mix adjustments, import exchanges and refining investments will allow at least a million barrels more light crude oil to be manufactured into finished products domestically in the short term. We have plenty of time to discuss and better understand the implications of crude oil exports, as well as to address other regulations imposing barriers to free trade.