Commerce Department ruling allows foreign sale of minimally processed ultralight oil.

After nearly four decades, the Obama administration has opened the door – slightly – for U.S. exports of unrefined American oil.          

The decision was approved by the U.S. Department of Commerce’s Bureau of Industry and Security in June, and will allow only two companies – Pioneer Natural Resources Co. and Enterprise Product Partners LP – to export Eagle Ford condensate that has been run through a distillation tower.

Condensate and light crude oil make up a majority of production in the Eagle Ford Shale play. Lighter crudes and condensate are easier to process into refined products.

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“This will change the whole condensate marketing landscape,” says Josh Weber, senior vice president at Howard Energy Partners.          

Crude production in the U.S. has boomed in recent years thanks to horizontal drilling and hydraulic fracturing in the shale fields. Output has risen 46 percent since the start of 2012, to almost 8.5 million barrels a day, according to the U.S. Energy Information Administration (EIA).          

The EIA says inventories reached 399.4 million barrels in April, the highest since the EIA began publishing weekly data in 1982.          

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“This could be viewed as a work-around of the U.S. export ban on crude oil,” says Sandy Fielden, analyst at RBN Energy, which is a Houston-based consulting firm.

The Commerce Department’s ruling is a shift from rules put into place after the Arab oil embargo in the 1970s that allow U.S. companies to export refined products such as gasoline, but not unrefined products (crude and condensate), with certain limitations and special licensing provisions.

Stabilizing condensate

The rulings by the Commerce Department define some ultralight oil as fuel after it has been minimally processed, making the oil eligible for sale outside of the U.S.          

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Crude that has been processed through stabilizers to make petroleum products is no longer raw oil and can be exported without a license, according to Commerce Department spokesman Jim Hock in a written statement on June 24. The U.S. prohibits most exports of unprocessed crude.          

Several oil processing and transport companies are investing in splitters – very basic refineries that will allow condensate to be put through simple processing so the resulting products can be exported.          

Pioneer’s solution is a facility called a gathering unit in the Eagle Ford that gathers production from wells in the surrounding area and lowers vapor pressure and removes volatile lighter hydrocarbons.  

Pioneer had argued that this meant the stabilized condensate should count as a processed petroleum product, eligible for export without a license.

“Earlier this year, following discussions with the Bureau of Industry and Security, Pioneer filed a submission under BIS’s standard commodity classification process,” Pioneer says in an emailed statement. “BIS recently confirmed our interpretation that the distillation process by which our Eagle Ford Shale condensate is stabilized is sufficient to qualify the resulting hydrocarbon stream as a processed petroleum product eligible for export without a license.”

Dozens of stabilizers dot the Eagle Ford. The tall, cylindrical towers range in size from 500 bpd to an 80,000 bpd tower near Gardendale, Texas, owned by Plains All American.          

Stabilizers are simpler and cheaper to build than condensate splitters, which split the oil into components like naphtha and distillates that can be freely exported under U.S. laws that otherwise prohibit crude exports without a license.

What will it do for the market?

The impact of the Commerce Department’s ruling could be significant. Light and ultralight oil account for a huge share of the recent growth in U.S. oil production, making up 96 percent of the 1.8 million bpd increase from 2011 to 2013, according to the EIA. The EIA also predicts that the supply of light oil will continue to outpace that of medium and heavy crude through 2015, accounting for more than 60 percent of production growth.

“The permit cracks the door open, but it’s probably still in its baby steps,” says Pearce Hammon, an analyst at Simmons & Co. International.        

RBN Energy says U.S. production of condensate doubled from 494 million bpd in 2011 to 1.05 billion bpd in 2013. It forecasts that number to reach 1.62 billion bpd in 2018.

GOP Sen. Lisa Murkowski of Alaska says lifting the U.S. ban on exporting crude oil would boost domestic oil production, lower U.S. gasoline prices and increase U.S. jobs. However, environmental groups say it could actually increase gas prices.

“Pioneer’s success in arguing that a lightly processed condensate is a refined product shows the administration is being thoughtful about the crude export issue,” Weber says.

There are more oil companies that are looking at the opportunity because they have access to similar technology, according to the bank Morgan Stanley, citing discussions with the companies.

Those companies are Anadarko Petroleum Corp., Marathon Oil Corp. and Devon Energy Corp.

“This should strengthen the price of condensate because it gives it another outlet,” says John Auers, executive vice president of Turner, Mason & Company, a Dallas-based engineering consulting firm. “How much, I don’t know. It’s a story that’s still developing.”

Auers says potential markets include Asia for the petrochemical industry and South America, which could use condensate to dilute its heavy oil for pipeline transport.

Auers called the decision by the Commerce Department “a very politically safe step.” He says it remains to be seen whether the move will ease some of the domestic glut of condensate and the calls for increased exports.

“Everybody’s going to see how this works, and does this relieve the pressure at least for some period of time,” Auers says. “I think that’s the hope of the administration.”

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