Crude Export Ban No Match for Lightest

U.S. Shale Oil: Energy

By Bradley Olson & Mike Lee - Feb 25, 2013 6:09 PM GMT-0600

A glut of shale oil in fields from Texas to North Dakota is forcing producers to find ways
around the U.S.s three-decade-old ban on crude exports in order to seek higher prices
in foreign markets.
Kinder Morgan Energy Partners LP is among companies setting up mini-refineries to
process certain grades of crude just enough to qualify them as refined fuels, which are
legal to export.
The industrys best hope is ultra-light oil, which is so abundant in shale rock that it has
flooded the Gulf Coast and traded for a record discount to global benchmark Brent
crude last quarter. Potential revenue for exports is $40 billion a year based on global
prices, or about $9.7 billion more than what the same oil fetches in the U.S.
Its going to get exported in one way, shape or form or another, said Ed Hirs, a
professor of energy economics at the University of Houston who also runs a small
production company in Texas. Producers will sell it abroad as a product in its own
right, or its going to be exported as a finished good, having become diesel, plastic or
fertilizer.
Ultra-light oil, known as condensate, is pure enough that it was poured directly into the
gas tanks of California cars in the 1920s. It may make up as much as 14 percent of
U.S. crude production in 2013, or almost 1 million barrels a day, about 66 percent
more than its level three years ago, the Houston-based energy consultant RBN Energy
LLC estimated.

Oils Vanguard
Because there are not enough buyers where its pumped, the easy-to-refine crude has
become the vanguard of an effort by the oil industry to get Congress to further weaken
U.S. limits on most crude oil and natural gas exports that have been in place since the
early 20th century.
The government last year began approving plants to liquefy and ship natural gas
overseas on tankers. That was the biggest policy change since the rules were
tightened in the 1970s, when securing domestic supplies got priority after Middle East
turmoil led to shortages and long lines at filling stations.

With a burgeoning output from shale having reduced U.S. oil prices, Congress is being
asked to weigh the benefits of cheaper gasoline and diesel for consumers against
higher profit for energy companies that want to export part of their output.
This is all new ground, said Scott Schwind, an attorney at Jones Day in Houston who
regularly handles fuel supply and delivery contracts. Weve been hearing
about energy security for all of our lifetimes, so to even talk about exporting is a major
shift that will bring about some weighty political questions in Washington.

Narrow Discounts
Allowing exports could narrow price disparities between U.S.-produced oil and imports
such as Brent by opening new markets outside of the refineries on the Gulf Coast.
Condensate prices have been falling as supplies of light oil has grown. U.S.
condensate sold for a record average of $26.47 a barrel less than Brent oil in the
fourth quarter of 2012, compared with an average difference of $6.70 in the same
quarter of 2010, according to data compiled by Bloomberg.
Valero Energy Corp. (VLO), Kinder Morgan and Marathon Petroleum Corp. (MPC) are
spending $850 million to build mini-refineries or upgrade existing plants to process the
ultra-light crude. The soonest to come online is Kinders, set for the first quarter of
2014.
The plants will do little more than heat oil and condensate to a boiling point and distill
them into separate fluids. Prices for condensate average about $4.57 less per barrel
than heavier U.S. crude, crimping producer profits by as much as $1.7 billion a year,
according to calculations based on RBN Energy data.

Raw Material
Valero was granted permission by U.S. regulators to send a limited amount of crude to
its Quebec refinery, spokesman Bill Day said in an interview. The company does not
support widespread crude exports, he said.
To us it makes more sense to keep the raw material here and process it here with
American labor and expertise and have value-added products that you can market to
the world, he said.
Marathon anticipates that high volumes of condensate eventually produced in Ohios
Utica field will be consumed in the Midwest and wont reach the U.S. Gulf Coast for
potential export, CEO Gary Heminger said in an interview.

Kinder Morgan will process condensate for companies, and wont control where the
products are shipped, Don Lindley, a vice president in the companys refined products
pipeline division said in a Jan. 30 interview.

Oils Backwater
Condensate used to be the backwater of the backwater, and it hasnt mattered until
now, said Rusty Braziel, president of RBN Energy, who predicts that the growing
volume of condensate swamping the Gulf Coast market will be exported to Canada or
elsewhere. All of a sudden weve got a lot of it, so it matters now.
Condensate can flow from both oil and natural gas wells. The processing units
envisioned by Kinder Morgan and others can convert low-cost condensate to
petroleum products for as much as $1 to $2 cheaper per barrel than a conventional
refinery, said Alfred Luaces, senior director of global petroleum markets at IHS.
The units, called splitters, may be able to process as much as 300,000 barrels of crude
a day, Luaces said. The mini- refineries being built split the condensate into naphtha,
a feedstock for making plastic and other chemicals, and kerosene, which can be
exported to markets in Asiaand Latin America, he said.

Cheaper Option
Those chemically simpler products may not fetch as much as finished gasoline or
diesel fuel, but the lower cost of running the splitter makes it attractive to sell them on
international markets, said Judith Dwarkin, chief economist at ITG Investment
Research Inc. in Calgary.
Its a cheap way around the export limitation, Dwarkin said in an interview.
Limited demand for expanding light oil supplies among Gulf Coast refiners configured
to handle heavier crude led the Commerce Department last year to approve more
exports of condensate and light oil for companies including BP and Royal Dutch Shell
Plc. (RDSA) Crude exports rose to 73,000 barrels a day in November, the highest total
in that month since 1999, according to the U.S. Energy Information Administration.
There are no limits on refined products. U.S. fuel exports reached an all-time high last
year of an average 2.6 million barrels a day, according to Energy Department data.
U.S. fuel imports from OPEC have fallen 37 percent, and the countrys
petroleum deficit, the difference between the cost of its hydrocarbon imports and
exports, fell to $18.7 billion, the lowest since 2004, according to data compiled by
Bloomberg.

Some molecules are painted with a no export sign, said Braziel, of RBN. Other
molecules are painted with the OK to export sign, and there doesnt seem to be any
rhyme or reason as to why some molecules are OK and some arent.