U.S. oil producers anxious to export booming supplies of domestic crude may have another way around a ban in place since 1975, this one via Mexico.
Mexico’s state oil company, Petroleos Mexicanos, or Pemex, has expressed interest in importing some of the lighter oil the U.S. has in abundance, swapping it for heavier Mexican oil that U.S. refineries are able to process.
If approved by the U.S. Commerce Department, it would be another exemption permitted by President Barack Obama’s administration, which this year let two oil producers sell a lightly processed form of crude overseas.
The drive to skirt the 40-year-old ban underscores a transformation as new drilling techniques have taken the U.S. from depending on oil imports to producing so much crude that Congress is debating an end to the prohibition. Legislation hasn’t advanced, though producers have found ways of circumventing the ban to reach overseas markets.
"There is no appetite for lifting the export restrictions wholesale, but perhaps greater willingness to allow incremental exports under the current rules,” Jacob Dweck, a lawyer at Sutherland, Asbill & Brennan LLP who represents companies seeking to end the ban, said in an interview.
Oil Embargo
The U.S. banned crude exports in response to the Arab oil embargo in 1973, though some exceptions, including sales to Canada, are allowed. Domestic producers are pushing to ease or end the prohibition, citing a mounting glut of crude from shale formations in North Dakota and Texas that will soon outstrip refining capacity. Hector Moreira, who is leaving Pemex’s board on Sept. 18, said the company is contemplating importing oil, after decades of relying on its own production, in part as a consequence of Mexico’s move to reform its energy industry."Pemex’s refineries could benefit from an improved mix of crude, and to improve that mix we need to consider importing, that’s especially important amid the opening of the industry where Pemex will now face competition,” Moreira said in an interview.
The Obama administration could grant Pemex’s request under an exemption that permits so-called swaps or other exchanges. In such a deal, the U.S. could trade the light sweet crude oil for a heavier oil from Mexico that refineries in Texas and Louisiana are set up to process. No action is needed by Congress.
Hydraulic Fracturing
For four decades, the crude export ban was of little consequence. Domestic production was falling as producers such as Irving, Texas-based Exxon Mobil Corp. (XOM) explored overseas for easier to reach reserves.
The advent of horizontal drilling and hydraulic fracturing, or fracking, in
which drillers shoot water, sand and chemicals underground to break up rock and
free trapped oil and gas, has pushed U.S. production
to its highest point since 1987.
This U.S. energy renaissance has prompted companies awash with crude to seek new markets. Producers are pressing Congress to ease the ban, while also chipping away at the prohibition with requests for Commerce Department licenses.
One of Dweck’s clients is Enterprise Products
Partners LP (EPD), which along with Pioneer
Natural Resources Co. (PXD) won approval from the department to
export a type of ultra light oil known as condensate. Light oil is less viscous
than heavier oil.
Refined Products
The Commerce Department said the fuel coming out of a stabilization tower -- used to remove gases to make the crude less volatile -- qualified as a product and therefore wasn’t subject to the export ban. Refined products aren’t covered by the ban.
Other companies are also seeking permission to export lightly processed condensate.
The volume Pemex may buy wouldn’t dent the oversupply of U.S. light oil. IHS Inc., an energy research and consultancy firm in Englewood, Colorado, said in a May report that the U.S. may be able to export as much as 1.7 million barrels of crude a day if production continues to rise.
Pemex’s interest is drawing new attention to existing loopholes to the export ban.
"We have lots of light sweet crude due to shale, and lots of refining capacity for heavy sour crude,” said Jeff Navin, a deputy chief of staff at the Energy Department when it began to receive applications from companies looking to export another fuel, liquefied natural gas. "Mexicohas lots of heavy sour crude. On it’s face, there’s an easy solution, but you have to go through a regulatory process designed for a different time -- long before we had access to shale resources.”
Tough Standard
Companies could exchange batches of crude with Pemex, or they could trade light sweet crude for a refined product like gasoline under a more complex transaction called a swap, Dweck said.
Both trades require Commerce Department approval, he said. One advantage of
a swap is that it would allow for participation with nations beyond Mexico.
Under a swap, companies have to show that the oil produced domestically isn’t
marketable in the U.S., which can be a tough bar to clear, said Christian
Davis, an attorney at Akin Gump Strauss Hauer & Feld LLP in Washington who represents companies seeking
export approvals.
"The application can’t state that, ‘There’s a glut of crude oil in the U.S. and therefore our crude oil isn’t marketable,’ by showing large macro-economic graphs and trends,” Davis said in an interview. "The application has to be product specific.”
National Interest
Obama could find that exports to Mexico are in the national interest, a
determination President Ronald Reagan made
for sales to Canada in 1985. That would
let companies sell light sweet crude to Mexico without needing to swap any oil.
The Energy Information Administration
said about 213,000 barrels a day were exported to Canada in May.
Pemex’s preference is likely an arrangement like Canada, given the
complexity of swap deals, said Adrian Lajous, a former executive at the company
and now a fellow at Columbia University’s
Center on Global Energy Policy.
Jason Bordoff, the center’s founding director and a former Obama adviser on energy and climate issues as a member of the National Security Council, said sweeping policy changes may be unlikely given the political risks should gasoline prices increase.
That may leave condensate sales and swaps as the best options for companies for the time being, he said.
Spokesmen for the White House and Commerce Department spokesman declined to comment.
33 Percent
Last year, oil imports accounted for 33 percent of U.S. consumption, the
lowest level since 1985, EIA said. The energy boom has companies including
Exxon and groups including the American Petroleum
Institute in Washington lobbying to lift the ban by arguing it won’t
raise gasoline prices and will help the economy.
IHS’s study concluded that removing the ban would lead to a total of $746 million in additional investment from 2016 to 2030 and increase average daily production by 1.2 million barrels in the U.S.
It said exports could reach 1.5 million barrels a day by 2020. With the ban in place, the difference between the U.S. West Texas Intermediate benchmark and the global crude price could increase, discouraging domestic production.
Energy trades could offer a "very limited escape valve” for producers,
according to a report prepared by staff to Senator Lisa
Murkowski, the top Republican on the Energy and Natural Resources
Committee who favors lifting the export ban.
"Exchanges cannot solve the mismatch between refineries geared to process
heavy crudes and record production of lighter grades of petroleum, but they
would be a partial measure that could help alleviate some of the glut,” the
report said.
Bloomberg
