RPT-COLUMN-U.S. crude oil exports may be inevitable: Kemp
By John Kemp
LONDON Oct 15 (Reuters) - Requests from Shell, BP and Vitol, among others, to start sending substantial amounts of U.S. crude to refineries in Canada have hit the headlines, as oil producers try to find outlets for surging production of light oil from North Dakota and elsewhere by easing decades-old restrictions on exporting domestically produced crude .
Less well-known is that record volumes of light hydrocarbons such as propane, butane and pentane are already being exported, as oil and gas producers seek alternative markets for the prodigious quantity of natural gas liquids (NGLs) now being produced alongside oil and gas from shale formations.
Record volumes of natural gasoline (pentanes-plus) are being sent to Canada for use as diluents to transport heavy crudes being produced from Alberta's tar sands. Butane goes mostly to Canada as well. But propane and propylene are being exported more widely across Latin America to Brazil, Chile, Ecuador, Honduras, Mexico and Venezuela, as well as to more far-flung destinations like China and Europe.
NGL exports tripled between 2006 and 2011, from 68,000 barrels per day to 249,000 barrels per day. In July 2012, exports hit a near-record 321,000 barrels per day, according to the Energy Information Administration (EIA), the independent statistical arm of the U.S. Department of Energy (Chart 1).
Natural gasoline, exported exclusively to Canada, accounts for one-third of the total. Most of the rest is propane/propylene, with a small but growing volume of butane (Charts 2-4).
Butane exports are seasonal, peaking in the summer, when air quality regulations severely restrict the amount of butane that can be blended into the gasoline supply. Some butane is put into storage for blending into winter gasoline. But the petroleum industry is increasingly relying on exports as a safety valve.
Even with record exports, the U.S. oil and gas industry has struggled to find markets for all the NGLs coming onstream.
NGL stocks currently stand at 188 million barrels, up from 147 million at the same point last year, according to EIA. As a result, butane prices have fallen to just $62 per barrel, down from $75 in 2011. Natural gasoline prices are down to $87, from almost $100 last year (Chart 5).
EXPORTS OF LIGHT SWEET OIL
The same oversupply problem that has bedevilled NGL producers is likely to occur with the light sweet crude oils being produced from Bakken and other shale plays.
U.S. imports of light sweet crude (mostly from West Africa) will dry up by 2014, according to Total, due to rising production from Bakken and other shale deposits as well as because of U.S. refinery closures.
But the increasing domestic output of light sweet crude is a poor match for U.S. refineries, which have been reconfigured to process much heavier and sulphurous oils and need heavier oils to produce more heating oil and diesel.
Pressure will therefore build for the federal government to permit crude exports.
CCL EXPORT RESTRICTIONS
Crude exports are regulated under the Energy Policy and Conservation Act (1975), the Mineral Leasing Act (1920), the Outer Continental Shelf Lands Act Amendments (1978), and the Naval Petroleum Reserves Production Act.
Crude is listed as a commodity in "short supply" on the Commerce Control List (CCL) drawn up and enforced by the Bureau of Industry and Security (BIS) at the U.S. Department of Commerce.
"A license is required for the export of crude oil to all destinations, including Canada," according to BIS (15 CFR 754.2).
However, exports of refined products and natural gas are not restricted in this way. So the regulations need to distinguish between them and crude - which is not as easy as it sounds, since they all contain mixtures of liquid and gaseous hydrocarbons in various proportions.
"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," according to BIS.
"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" (15 CFR 754.2(a)).
OIL SWAP TRANSACTIONS
BIS will generally approve export applications to Canada of crude for consumption or use therein (Section 754.2(b)(ii)).
Other exports are reviewed on a case-by-case basis. They are usually only allowed if the exports are part of an "overall transaction" that will:
(A) result directly in the importation into the United States of an equal or greater quantity, and an equal or better quality, of crude oil or products;
(B) take place only under contracts that may be terminated in the event of a disruption to U.S. oil supplies; and
(C) the applicant can show that for "compelling economic or technological reasons" the crude cannot reasonably be marketed in the United States.
In other words, U.S. crude can only be exported as part of a "swap arrangement." It must be exchanged for more or better crude or products, under contracts that can be interrupted if necessary, and where the swap is needed for refining or marketing reasons which are beyond the exporter's control.
LIGHT ENDS ARE NOT CRUDE
BIS regulations explain the pattern of U.S. oil and gas exports to date. Butane and propane are both very light hydrocarbons that do not remain liquid once brought to the surface and separated from the gas and oil, unless they are chilled and/or pressurised. Both therefore fall outside the definition of crude and can be exported without restriction.
Natural gasoline remains liquid and is therefore defined as crude by BIS. It can be exported without restriction to Canada, but any other destination requires BIS approval, which explains why all but very tiny quantities of pentanes-plus are sent to Canada.
Everything heavier than pentane is liquid at atmospheric pressure, so exports are severely restricted except to Canada.
In 2011, the United States exported 47,000 barrels per day of crude, according to EIA, almost all from the Midwest region (PADD 2), with tiny amounts from the Northeast (PADD 1). Every drop went to refineries in Canada.
LOBBYING LANDSCAPE FOR SWAPS
The simplest way to obtain approval to export the emerging surplus of light sweet crude would be to propose a swap.
U.S. oil producers would send crude north to Canadian refineries, then re-import an equivalent volume of products for the U.S. domestic market, citing the difficulty of marketing sufficient light crude to U.S. oil refineries given the limitations of the domestic refining system.
If U.S. light crude production continues to grow, it may eventually be necessary to approve swap arrangements with refineries further afield.
The main constraint is political. U.S. refiners can be expected to lobby fiercely against swap transactions, since they benefit most from the over-supply of captive domestic crude. And export opponents will be able to mount a powerful emotional appeal to keeping "American oil" at home for American use.
Against this, domestic producers will lobby to be allowed to export to maximise the economic value of their output, and will likely receive strong support from trading companies.
Some form of exports seem inevitable. While policymakers speak of energy independence and may want to reserve U.S. crude and natural gas production for the exclusive use of domestic refiners and customers, it makes no commercial or technical sense to prohibit all exports, given the growing mismatch between what U.S. oil fields are producing, U.S. refiners can handle, and U.S. customers need.
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