Is The US Heading Toward Crude Exports?

BMI View: Rapidly increasing domestic oil production on the back of the shale boom is igniting debate in the US over whether to overturn a multi-decade ban on crude exports. We see some scope for the eventual removal of the ban as US refiners begin to near the limit of domestic crude they can refine, and a recent shift in tone by a number of major players suggests potential for greater acceptance of crude exports. That said, given the high degree of politicisation such a debate will engender, it is likely to be a drawn out fight.

Huge gains in US production in recent years have begun to call into question a ban on exporting crude oil abroad. The law, created in the wake of the 1970s oil embargoes, allows for crude exports only in certain, very specific cases, such as exports from Alaska's Cook Inlet, 25,000 b/d of Californian heavy crude or exports of foreign-origin crude. In all other circumstances, exporters are required to obtain a license (valid for one year) with the requirement that it be granted only in cases when the exports are consistent with the national interest and the purposes of the Energy Policy and Conservation Act.

However, in recent quarters, with ever-increasing amounts of domestic light, sweet oil output, the Commerce Department has been faced with a surge in companies looking to secure licenses to export crude abroad. Indeed, although we believe that integrated companies generally prefer to export fuels rather than crude given that they are a higher value add product, and this underpins our view that refined products exports will expand by 40% over the forecast period, ( see 'Structural Shift In Fuels Trade To Gain Momentum', November 22), we also acknowledge that in some circumstances, refining the crude is less desirable, for example because of a lack of sufficient infrastructure. This has seen the government grant 103 licenses to ship crude abroad in FY 2013, and exports rising to 132,000 b/d earlier this year. While miniscule in comparison to total US production (an estimated 11mn b/d in 2013), we note that this is the largest level of exports in more than a decade, and the clamour for licenses is unlikely to die down in the near future.

Shale Boom Boosts Exports (A Little)
US - Crude Oil Exports, '000b/d

Is The US Heading Toward Crude Exports?

BMI View: Rapidly increasing domestic oil production on the back of the shale boom is igniting debate in the US over whether to overturn a multi-decade ban on crude exports. We see some scope for the eventual removal of the ban as US refiners begin to near the limit of domestic crude they can refine, and a recent shift in tone by a number of major players suggests potential for greater acceptance of crude exports. That said, given the high degree of politicisation such a debate will engender, it is likely to be a drawn out fight.

Huge gains in US production in recent years have begun to call into question a ban on exporting crude oil abroad. The law, created in the wake of the 1970s oil embargoes, allows for crude exports only in certain, very specific cases, such as exports from Alaska's Cook Inlet, 25,000 b/d of Californian heavy crude or exports of foreign-origin crude. In all other circumstances, exporters are required to obtain a license (valid for one year) with the requirement that it be granted only in cases when the exports are consistent with the national interest and the purposes of the Energy Policy and Conservation Act.

However, in recent quarters, with ever-increasing amounts of domestic light, sweet oil output, the Commerce Department has been faced with a surge in companies looking to secure licenses to export crude abroad. Indeed, although we believe that integrated companies generally prefer to export fuels rather than crude given that they are a higher value add product, and this underpins our view that refined products exports will expand by 40% over the forecast period, ( see 'Structural Shift In Fuels Trade To Gain Momentum', November 22), we also acknowledge that in some circumstances, refining the crude is less desirable, for example because of a lack of sufficient infrastructure. This has seen the government grant 103 licenses to ship crude abroad in FY 2013, and exports rising to 132,000 b/d earlier this year. While miniscule in comparison to total US production (an estimated 11mn b/d in 2013), we note that this is the largest level of exports in more than a decade, and the clamour for licenses is unlikely to die down in the near future.

Shale Boom Boosts Exports (A Little)
US - Crude Oil Exports, '000b/d

At this stage, we still take a cautious stance. On the one hand, we acknowledge that the current environment is fundamentally different from that in which the ban was put into place. Indeed, this has made it possible to consider having this debate in the first place. That said, the issue of exporting crude abroad is likely to remain a highly charged issue, suggesting it is unlikely to be easily (or quickly) resolved. In this regard, there are several factors which we will be watching as key determinants:

Hitting (Light Sweet) Refining Capacity?: One of the biggest drivers of the debate is likely to be the extent to which domestic refiners can continue to accept the rising light sweet crude production. At this stage, while the US has more than sufficient refining capacity to meet its domestic refined products demand overall, there has been concern from some quarters that the facilities are not necessarily configured to accept the high quantities of the domestically produced light, sweet oil. Namely, before the shale boom gained legs, many of the Gulf Coast refiners had invested heavily to increase their capacity to take the heavy sour crudes from the Middle East, Latin America and Canada. This has seen the average crude that most refineries can accept far more heavy and sour than the oil that is now being produced in mass quantities in the US.

Domestic Crude Is Lighter And Sweeter Than Average Refinery Capacity
US - API degrees (Y-axis) & Sulphur Content (x-axis), By PADD

In light of the swelling access to WTI and with more to come as the Keystone Gulf Coast pipeline comes online in early 2014, some reconfiguration is under way. For example, in 2015 Valero intends to start up new crude 'topping units' at its 88,000b/d Houston refinery and its 200,000b/d Corpus Christi refinery to allow more lighter crude to be run and maximise gasoline and diesel production. That said, given that we have begun to see some politicians and technocrats question the crude export ban, other firms may be hesitant to undertake the capital expenditure-intensive process of switching over the refineries, unwilling to take the bet that US policy on exports won't change.

Light Crude Imports Plunging
US - Light Crude Imports By API Gravity, % of Total

One determinant of whether the refiners are willing to undergo the expensive upgrades may be the extent to which they are able to access heavier Western Canada Select, for example, if the Keystone XL pipeline is finally permitted to be built. Namely, as they are set up to convert lower-priced heavy crudes into high value products, if refiners are able to access heavier crudes, lighter crude prices would have to fall dramatically, for them to consider it economical to make the upgrades to run them through their facilities. It seems highly unlikely that E&P firms would be willing to continue drilling in such a case. Ultimately, we note that if we were to see a lack of demand (or even a perceived lack of demand) start to substantially drive down domestic oil output, this could be a significant argument in favour or relaxing or removing the ban.

Shifting Political Tone - Still Contentious, No Longer Impossible: We also believe that notable shifts in tone by a number of major players could bode well for the eventual removal of the ban, and will be key to track. Integrated oil and gas companies, not least supermajor Exxon Mobile as well as ConocoPhillips have begun to issue statements in clear support of removing the ban. Perhaps more tellingly, Energy Secretary Ernest Moniz has also indicated that, with the US awash in domestic crude, it may be time to reconsider the ban.

That said, those looking to relax or remove the ban will still have a significant fight on their hands. Indeed, there is still a contingent in Congress that have indicated significant concerns that exports would raise domestic gas prices, and threaten supplies in case of political uncertainty in the Middle East. As such, given what a politically charged issue gas prices are, we note that attempting to repeal that ban will be a high bar for any legislator to cross. At the very least, this suggests it is likely to be a drawn out process.

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