What's new in production

T. Boone Pickens, the never-shy chairman of BP Capital Management and all-round oilfield curmudgeon, shook up an LNG Conference in Houston early last year by dismissing the notion of repealing the nation’s 40-year ban on crude oil exports. He told attendees that the U.S. should, instead, focus on reducing its dependence on Middle Eastern oil. “I am not too keen on exporting [crude oil], when we are importing 9 to 10 MMbpd,” he said, noting that 4.5 MMbpd of that comes from OPEC countries. Instead, Pickens added, the U.S. should strengthen its energy ties with North American partners Canada and Mexico.

This harkens back to the original reasons for the ban, which were patriotic and strategic. OPEC had used oil as a weapon to create economic disruption. The point of the ban was to keep American crude in America, conserve resources and reduce imports. In fact, it did not accomplish any of these goals, and rational thought would suggest that the ban should be retired. However, reasons for keeping the law have evolved with the times.

When Pickens made his remarks in January 2014, crude oil prices were peaking, with the West Texas Intermediate benchmark hovering above $100/bbl. More significant was the price spread. Beginning in 2012, every barrel of Brent Blend sold for at least $10 to $15 more, and often much higher, meaning that U.S. oil was being discounted significantly to domestic buyers. Refiners were able to get their oil cheaper, yet sell refined products at whatever price the world market would bear.

Since OPEC’s Thanksgiving turkey last November—the decision to protect market share rather than price—not only have world crude prices dropped by half, but the differential between WTI and Brent has shrunk, putting the two benchmarks much closer to parity. This changes the discussion in interesting ways.

What, exactly, is banned? Petroleum exports are licensed through the Department of Commerce’s (DoC) “short supply controls,” which list what can and cannot be sent outside the country. Some categories of crude are exempt, such as that produced in Alaska’s Cook Inlet, small amounts (25,000 bpd) of heavy crude from California, and any crude oil sent to Canada (provided it is consumed in Canada). 

Except for these and a few other minor exceptions, U.S. crude oil may not leave the country, except as a refined product. Even that is open to shifting interpretation. In 2014, the DoC quietly granted permission for two companies operating in Texas’s Eagle Ford shale—Pioneer Natural Resources and Enterprise Product Partners—to begin exporting “minimally processed” condensate. The ruling was intended to be a small exception to a clear set of rules, but in fact, it had the effect of throwing the 40-year-old law into a state of confusion.

For one thing, neither “condensate” nor “minimally processed” are clearly defined. Refiners often consider any oil above 45°API to be condensate, while others say 60° is the threshold. Minimally processed is generally understood to be any sort of distillation that separates NGLs from the oil. After the ruling, BHP Billiton, another Eagle Ford operator, announced it would begin exporting minimally processed, 52° crude without explicit DoC permission. 

The confusion has frustrated players on both sides of the debate. And, given the sheer volume of condensate being produced from shale formations, and especially since the price plunge put a vise grip on financials, some clarification from Commerce would be welcome.

Why keep the ban? U.S. refiners have put up with years of thin margins on petroleum products. After years of betting on heavy oil as the feedstock of the future, they have only recently begun to expand and upgrade some plants to accommodate lighter grades, and build the infrastructure to transport it. Discounted domestic feedstocks have finally given them an edge in the world markets, and the U.S. refined petroleum export market is now huge and lucrative. Nobody wants to turn out the lights, just as the party finally gets going. 

Another argument for blocking crude exports is that it could raise the price of petroleum products for the consumer, such as gasoline and heating oil. But now, with gasoline and other product prices at 10-year lows, that line of reasoning carries less weight, even if true.

Why dump the ban? Clearly, the U.S. industry has done a pretty good job of adapting to the existing law. However, the main beneficiaries of the imbalance created by the export ban are the refining companies in the middle of the country. Large integrated oil companies, with both upstream and downstream sectors, have less of a stake in the game, as they are able to profit, no matter which way the balance tips. Left off to the side are the independent upstream oil companies, who find themselves hobbled by the current market, and are the ones laying off workers and stacking rigs—and would benefit the most from  letting market forces determine where oil is bought and sold.

The American Petroleum Institute contends that rescinding the export ban could add $70 billion to upstream investments by 2020, but, of course, that assertion was made before the recent price reality set in. Still, it is certain that a big jump in U.S. crude exports would go a long way toward mopping up the excess production now drowning the upstream.

It wouldn’t necessarily take an act of Congress. Harold Hamm, founder and CEO of Continental Resources, told CNBC that President Obama could simply authorize exports. It’s true that the law explicitly allows the President to act, if he finds that the current ban is counter to the national interest. One of the few issues everyone in government agrees on is the need to reduce trade deficits. And crude oil is world trade at its grandest.