There was a lot of hoopla last week over the news that the U.S. Department of Commerce had seemingly loosened rules governing the export of condensate — light weight hydrocarbons recovered from oil and gas wells. The excitement was palpable; shares in oil refiners sold off. Was this the start of the big policy shift that oil producers have been dreaming of? An end to the 40-year oil export ban?
Maybe. But not in the way people thought. “I’m not sure reality lived up to the fanfare,” says Harold York, principal analyst with energy consultancy WoodMackenzie.
Andy Weissman, senior energy advisor at law firm Haynes & Boone says, “I think it’s quite important, but it’s a very technical ruling, like dotting an ‘i’ more than anything else.”
The White House, caught off guard by the initial coverage in the Wall Street Journal, said there had been no change in oil export policy. It’s still illegal to export American crude oil. It’s still illegal to export unprocessed “lease condensate.”
The Bureau of Industry and Security had, it seems, done little more than issue private letter rulings to Pioneer Natural Resources and Enterprise Products Partners agreeing that those companies’ plans for processing condensate were sufficient to qualify the condensate as exportable.
So what’s the big deal? It’s certainly no big deal that American oil producers can export condensate. They’re already doing so, in fast-growing quantities. In the data from the U.S. Energy Information Administration, processed condensate is falls mostly into the category of “pentanes plus.” A decade ago the U.S. was exporting 1,000 barrels of it per day. But as the Great American Oil And Gas Boom has taken hold, exports have jumped — to 32,000 bpd in 2010 and 200,000 bpd this year.
Refiners and pipeline giants like Valero, Kinder Morgan and Marathon Petroleum have, for several years now, been investing heavily in “mini-refineries” to take the streams of volatile liquid hydrocarbons flooding out of fields like the Eagle Ford shale of Texas and distill them enough to export.
There is one element of this story that is a big deal. And that is the fact that this most recent export approval was sought not by a refining or pipeline company, but by an independent oil production company — Pioneer Natural Resources.
For years now, as U.S. field production of oil and other petroleum liquids has exploded from 5.5 million bpd (2006) to 11.3 million barrels per day (April), the oil companies have been complaining that unless the export ban is lifted they will have to lay down their rigs and stop drilling — because there will be more oil than America’s refineries can handle.
That’s not a problem for the refiners, who are happy to be running their plants at capacity while able to pay a deep discount for domestic crude.
But if Pioneer and its many brethren like Continental Resources, Chesapeake Energy and Devon Energy can take matters into their own hands by building their own mini-refineries to process condensates, they will be able to pocket the margin that would otherwise go to the refiners. And by adding condensate-processing capacity of their own, they automatically open up capacity at the refineries to take more of their heavier crude. Pioneer expects that within a decade it will more than quadruple its production of oil and other liquids to more than 1 million barrels per day.
Attorney Weissman says that we could soon see a host of new condensate processing plants being built: “We could see 1 million barrels per day of condensate exports in a year.”
Still, they’re going to need a helluva lot more than some mini-refineries. Wood Mackenzie analysts figure that between now and 2020 drillers will add an incremental 4 million bpd of oil output, bringing the domestic supply above 15 million bpd. Analyst York believes all that oil can get processed domestically. “We can get it into the U.S. refining system. It physically fits. It’s just a matter of price.” The producers will have to be willing to accept enough of a discount on their oil, relative to international prices, to coax the refiners to take it.
Most of the big U.S. refineries have been optimized to process heavier, higher-sulfur crudes than those coming out of Texas and North Dakota. But a $10 per barrel discount for U.S. crudes should, over the long-run, incentivize refiners to buy American.
U.S. imports of crude oil and products have fallen from 14.5 million barrels per day in 2006 to 9.6 million bpd in April. In that same time exports of products like gasoline, diesel and condensates have jumped from 1.4 million bpd to 4 million bpd.
If WoodMac is right about the expected production growth, and if exports of gasoline and diesel (and condensate) continue to grow as American cars become more fuel efficient, then by the end of the decade the U.S. really could become a net exporter of petroleum.
Maybe then, when we’ve got more oil than anyone can figure out what to do with, Congress and White House will finally get behind a plan to end the crude oil export ban once and for all.
Article and Imaged sourced from forbes.com July 3rd, 2014.