While it has been observed earlier that the ban on exported crude oil does not apply to processed petroleum products, the ruling of the U.S. Department of Commerce to allow certain weights of crude oil that have undergone “minimal processing” is a potentially far reaching and welcome ruling to the petroleum industry. The Commerce Department stated that these light and ultra-light blends of crude oil that have been processed in a distillation tower can be classified as a petroleum product . This ruling allowing the vast majority of the light and ultra-light shale oils to qualify for the rights to export opens the door for much of the shale oil to qualify for the export category with only a minimum of processing.
This ruling opens the door to what could be described as “minimal processing“. This takes the whole procedure and the export laws one step closer to a general repeal of the export ban on crude.
Shawn Bartholomae, CEO of Prodigy Exploration Inc. stated “This event and the implications of the new rulings as they unfold are certainly of prime importance to our industry. We will watch this closely.”
The commerce department, with its recent rulings, has possibly cleared the way for the first exports of unrefined crude oil in forty years. Under the current body of rules, a ban is in effect that was imposed after the Arab oil embargo of the 1970’s, American companies can currently export refined fuels, classified as “petroleum products” but the crude oil itself is banned from exports. However crude oil shipments to Canada are allowed with a special permit.
To export crude oil, one has to obtain a license from the Bureau of Industry and Security. This department (BIS) also enforces restrictions on a range of other products. These can be any number of commodities often with dual military and civilian uses. The category of exports that fall under the bureau’s jurisdiction can cover a wide variety of products to include nuclear technology, law enforcement products and execution equipment.
To enforce the existing ban, BIS needs a concise legal definition of what is crude oil and what is not. The BIS regulations state hydrocarbons are no longer considered crude oil once they have been processed through a crude oil distillation tower. They do however remain vague on how many cuts the oil has to endure in order to be classified as ‘separated’,
Many players in the industry, as they view the new rulings, remain less than satisfied and they lobby congress calling for a fully open, and unrestricted export policy that will open the doors to all petroleum products.
It turns out that the question of what is crude is not easy to answer. Raw oil is a mixture of thousands of different molecules, mostly of carbon and hydrogen in varying proportions. Crude oil also contains oxygen, nitrogen, sulphur, nickel and vanadium. One doesn’t have to be a chemist to determine what is legal to export but the answer is important to the BIS . For this governing body to make a coherent ruling, they have to establish well defined standards for the industry to clarify the laws so that the buyers and sellers and each segment of the market can determine what products are in full compliance to the export laws.
From the time that BIS stated that lightly processed condensates would not be defined as crude oil, they then made it easier to comply with the export requirements. This meant that the shale oil could be exported just as easily as gasoline or diesel or jet fuel. This ruling is good news to the shale producers as much of the oil produced from shale is the light and ultra-light crude that can qualify with this minimal level of processing.
The rulings reflect as much of a change in the interpretation of existing laws as they would reflect on any new laws. Commerce Department defines some ultra-light weight oil as fuel after it has had this minimal processing, thus making the oil eligible for export outside of the United States.
The Brookings institute, an American think tank based on Embassy Row in Washington D.C., conducts research into a variety of American issues, especially when such issues affect the economy, This institute, ranked as the most influential think tank in the world, has estimated that the new rulings will allow for as much as 700,000 to 90o,000 barrels per day, additional oil that is newly qualified under the new interpretations and derived from shale to be exported starting next year. (2015)
Under the rulings, as outlined by the Commerce Department, condensate can qualify as a refined product suitable for export if the product is stabilized and distilled. Stabilization is a process that heats the oil up to a boil to burn off the most volatile gases. This is a usual first step in the refining process. Distilling is a small secondary step towards refining the crude. However it is far below the cost and complexity of totally refining the oil . These basic operations are classified as “minimal processing”
This comes as especially good news to the shale oil producers. The surge in crude production has led to the highest levels of oil production since 1986. The boom in “tight oil” or oil yielded from hydraulic fracturing operations, has propelled most of this increase. This increase in crude comes from the low-permeable rock formations The oil is mostly classified as light or ultra-light crude.
It is also expected that the market will be flexible in that the volume of these exports will continue to grow and will coincide with the expanding volumes of production from the shale fields, much of it coming from Texas and North Dakota. This is a good development that promises to keep the market stable by providing a direct outlet that will keep pace and support this expanding market. It is expected that the bigger market, the world market, can absorb the oil and gas from the booming shale fields without depressing the market.
While the short term effects on the refineries is expected to be relatively small, the long term effects of causing American oil to flow in unrestricted fashion to markets all over the world could be very significant. Many oil and gas analysts view these rulings as a significant first step, in what the industry hopes will be a continuing process in the chipping away of the export ban.
Currently the nation is producing over three million barrels a day from shale formations. From 2011 to 2013, oil output has soared by 1.8 million barrels a day .The Energy Information Administration states that most of this new production, 96% of the increase, is the light or ultra-light oil coming from shale. Making this oil easily exportable is the focus of the new interpretations of the export laws. This will be the majority of the oil that will be allowed to be exported under these new rulings with minimal processing.
This ruling is expected to set off a flurry of activity as condensate producers across the country are rushing to get their applications in. The long-term effect on the refineries of crude oil should be small. The overall effect, the bigger picture is very significant. By causing the U.S. oil to flow in unrestricted fashion to markets around the world could be highly significant.
However one important aspect that is different in the ruling from the Commerce department. This ruling is selective in that it is not uniform.
The law to open up the export of petroleum distillates is restricted to those corporations that have made application to the Commerce department and who have obtained the export permit. The first permits are issued to the companies that have lobbied for the legal rights or the lifting of the export ban.
The Commerce Department has stated that it is working on industry-wide guidelines to more clearly define what is eligible for export. This is viewed as a significant first step in what is hoped to set off a chain of reactions that will further open the foreign markets to U.S. crude.
According to the figures from the EIA (Energy Information Administration) in the last full year of data, 2013, condensate accounted for 274 million barrels. This cut was 11% of the nation’s crude oil production. +
The CEO of Prodigy Exploration Inc., Shawn Bartholomae stated ”This is an important ruling that will immensely affect the shale producers across the country, many of whom are in Texas. “
Shale oil is noted for having a high condensate level. Roughly one third of the oil production in the nation comes from Texas fields.
Many producers hold out the hope that the producers will soon see a total lifting of the export ban. “What we want is a ‘whole hog” liberalization of the ban on exports. This step would greatly simplify what is legal to export and at what stages of the process are needed to qualify. “
Prodigy Exploration Inc. and the CEO of the firm, Shawn Barholomae, would join with the producers of Texas in expressing the hope that we can soon see a totally free oil market, a complete lifting of any export ban that will give the industry unrestricted access to the market and allow us to sell all petroleum products to the rest of the world.