Crude Export Ban No Match for Lightest U.S. Shale Oil: EnergyBy 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 industry’s 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.

“It’s 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 it’s 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.Oil’s Vanguard

Because there are not enough buyers where it’s 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. “We’ve 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 Kinder’s, 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 Ohio’s

Utica field will be consumed in the Midwest and won’t reach the U.S. Gulf Coast for

potential export, CEO Gary Heminger said in an interview.

Kinder Morgan will process condensate for companies, and won’t control where the

products are shipped, Don Lindley, a vice president in the company’s refined products

pipeline division said in a Jan. 30 interview.Oil’s Backwater

Condensate “used to be the backwater of the backwater, and it hasn’t 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 we’ve 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.

“It’s 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 country’s

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 doesn’t seem to be any

rhyme or reason as to why some molecules are OK and some aren’t.”