December 2015 saw the passing of legislation that will lift the ban on U.S. crude exports in place since 1975. The Republicans succeeded in pushing through the lift of the 40-year-old ban although such a move seemed unlikely just a couple of months prior. According to the Financial Times, President Barack Obama’s administration, although opposed to the move, is expected to accept a broad spending bill that also includes liberalization of oil sales.
Introduced as a response to the oil crisis of 1973-74, and signed into law as the Energy Policy and Conservation Act on December 22, 1975 by President Gerald Ford, the restrictions on export were seen as necessary to protect American interests as a major importer of fuel. Although the legislation is referred to as a “ban” it did allow for certain exceptions such as exports of crude oil to Canada, as long as the oil was used there and not sold on, exports of Alaskan oil using the Trans-Alaskan pipeline, and small amounts of specific heavy Californian crude oil. The overall policy aimed to discourage exports of crude while allowing shipments of refined products to reach 1.7 million barrels per day in 2012.
Removing the long-standing ban on exports was something that has long divided opinions in the United States. E&P companies called for easing of the restrictions, which would allow them to seek better prices abroad with domestic oil prices hitting all-time lows. Downstream companies, on the other hand, which have benefited greatly from a cheap and ample supply of hydrocarbons, were on the whole opposed to the change in legislation, threatening a loss of American competitiveness, a slowdown in manufacturing and, as a consequence, loss of jobs. Independent refineries in particular lobbied strongly against the change in legislation which allowed them to export their refined and finished products at a premium price.
Politically, Democrats on the Senate energy committee, who represent states where the oil refineries are concentrated, tended to oppose the lifting of the restrictions, while the Republicans, who hail from those states where the producers are located, were overall in favour of ending the ban.
Proponents of the lifting of the ban pointed to the fact that the protection it offered to the United States as a major crude importer is no longer a benefit in a world where – as the result of the shale renaissance – the country is turning into a net exporter of fuel. In reality the situation is not as straight-forward as it may seem. According to the Energy Information Agency, U.S. oil production has grown rapidly in recent years. Data reflecting combined U.S. production of crude oil and lease condensate show a rise from 5.6 million barrels per day (b/d) in 2011 to 8.7 million b/d in 2014. EIA’s August 2015 Short-Term Energy Outlook forecasted U.S. crude oil production of 9.4 million b/d in 2015 and 9.0 million b/d in 2016. However, simultaneously with this rampant production U.S. oil imports rose to 7.9 million barrels a day the second week in December (EIA).
Given the level of imports one might be excused for wondering why there is a push to export American oil in the first place. Surely the obvious solution would be to use the crude produced in the U.S. in the domestic refineries – further reducing the country’s reliance on foreign imports. This rather simplistic view overlooks the fact that not all crude is the same.
Most of the increased production in recent years has been shale-related and comes in the form of lighter “sweet” crude, while the majority of U.S. refineries are more suited to heavier crude oil slates that historically have been obtained cheaply from Canada, Mexico, and Venezuela. Economically, therefore, it makes more sense to export this light crude at premium prices to Europe and Asia where refineries are more suited to this type of input, rather than push it onto the domestic refineries which will only buy it at a discount.
“Allowing exports would enable light-oil producers to get world market prices, and their revenues would flow back into higher investment in [domestic] production,” energy experts Daniel Yergin and Kurt Barrow wrote in a Wall Street Journal commentary in 2014.
It’s no wonder then that the majority of shale operators have welcomed the development even if at current oil prices it may seem more symbolic than anything else. With Brent crude oil at $36.46 a barrel and West Texas Intermediate oil at $36.60 a barrel at the end of the year (30th December 2015), American producers would be exporting crude at a loss.
Despite that, Scott D. Sheffield, Chairman and CEO of Pioneer Natural Resources, which have long lobbied for the change in legislation, sounded buoyant when he commented on the news: “While current commodity prices may limit exports in the short run,” he said, “the long-term benefits are significant. As organizations such as the Brookings Institute and the Center for Global Energy Policy have stated, lifting the ban improves the country’s balance of trade, creates additional jobs and enhances America’s geopolitical position.”
Thanks to the U.S. Department of Commerce’s Bureau of Industry and Security decision which classified the company’s Eagle Ford Shale condensate as a processed petroleum product eligible for export without a license, Pioneer has already exported a significant portion of the company’s Eagle Ford Shale condensate production. It now expects to have the ability to physically export crude by the middle of 2016 to markets in Europe, Asia and Latin America.
Similarly positive statements were issued by other companies and organisations. Laredo Petroleum issued a press release in which Randy A. Foutch, Laredo Chairman and Chief Executive Officer said: “Forty years ago, in the throes of the OPEC oil embargo and declining domestic production, a ban on the export of crude oil was imposed by United States lawmakers. The shale revolution, powered by technological gains in horizontal drilling and completions, has reversed the steady decline in domestic oil production and increased proved oil reserves to levels not seen since the early 1970’s. Legislation lifting the ban on crude oil exports will enable Americans to better benefit from this energy renaissance through a strengthened economy and energy supply chain.”
In response to the repeal of the crude export ban, Elizabeth Craddock, Vice President, Policy and Government Affairs at the International Association of Drilling Contractors (IADC) said: “We are pleased that the Consolidated Appropriations bill incorporates language critical to helping our industry get back to business. Repealing the outdated crude oil export ban will help the U.S. supply the world market with safe and reliable oil while also bolstering production to fuel the U.S. economy. (…) Particularly at a time of market correction in the oil and gas industry, these are very positive outcomes. IADC looks forward to seeing this bill passed by both Chambers this week and signed into law by the President.”
Meanwhile, the American Fuel & Petrochemical Manufacturers (AFPM), while not opposing the law directly, was overall less congratulatory when, in a letter to Senate Majority Leader Mitch McConnell, it expressed opposition to any legislation that includes new subsidies or energy taxes in exchange for lifting the crude oil export ban.
In the letter signed by AFPM President Chet Thompson, he writes that while AFPM’s long-standing position has been to support free markets, “and as such, does not oppose lifting the crude export ban. We also believe that Congress should repeal other market-distorting policies, such as the Renewable Fuel Standard and the Jones Act. AFPM, however, will not compromise one free-market principle to secure another, and thus we would vigorously oppose any agreement or legislation linking the lifting of the crude export ban with new or extended energy subsidies, mandates, or taxes.”
By Monica Thomas
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