A Slightly Refined, But Still Crude Export Ban

Is the four decade-long ban on US crude oil exports over? If you've been following the news this week, you might be under the impression it is. Tuesday, two small US oil companies received an official stamp of approval to start exporting Texas tea of an ultralight variety called condensate from the Eagle Ford shale region. Oil producers stocks skyrocketed! US-based refining stocks fell! And already, some are hotly debating the potential influence of a big increase in US oil exports. However, we'd caution against thinking these daily wiggles reflect a big, fundamental change-the ruling's near-term impact seems to be overblown.

Following the 1970s Arab oil embargo, which led to gas shortages and lines, politicians slapped a ban on shipping US domestically produced crude oil abroad. However, refined oil products-gasoline, etc.-were and are ok. The oil had to be processed to permit export.

Many in the media and punditry consider these two small firms' permits a landmark shift, especially given US production of ultralight oil or condensate reached about one million barrels per day in 2013.^[i]Imagine the export potential, they breathlessly suggest. Headlines screamed: "Condensate Pries Open the Oil Export Lid;" "How a US Decision to Allow Oil Exports Could Change the World's Energy Balance;" "What Is Condensate? Introducing America's New Oil Export."

But it seems many are misinterpreting what actually happened. "There has been no change in policy on crude oil exports," according to US Department of Commerce spokesman Jim Hock. The oil the two firms are permitted to export is processed condensate. Condensate, a very light type of oil, is distilled by the firms to increase its stability. The government's ruling just means this distillation process sufficiently chemically alters the resulting oil to qualify it for export. And this isn't entirely unanticipated-it's really just a clarification. Several firms have been investing in splitter refineries-a distillation unit that changes the composition of condensate-with the understanding they could export lightly refined condensate. The rulings merely offer a legal assurance for the two small firms. That assurance is likely necessary-owing to the fact the government's standards on what qualifies and what doesn't is hazy to say the least. Even the degree to which the condensate needs to be refined remains fuzzy since details of the rulings have not yet been released. Still, the rulings may on the surface seem to potentially open the door to increased exports down the line.

However, there are other hurdles that aren't insignificant. Like the question as to whether there is necessary infrastructure to support a growing number of exports. Already, a supply glut exists in the gulf ports since many refineries located there can't refine condensate-it's just too light and volatile. They aren't equipped to run lighter crudes or condensate without mixing them with heavier crudes (the catch: "blending" ultimately reduces the value of the end product). Hence, condensate oil has been trading anywhere from 10-30 per barrel cheaper than West Texas Intermediate benchmark prices. There are refineries elsewhere in the US that could accommodate condensate, but that's when you run into another antique regulation.

The Jones Act (officially, the Merchant Marine Act of 1920)-enacted in the wake of WWI-was intended to ensure the US would have a robust Merchant Marine service for national security reasons. Now, this law doesn't directly impact exports, but it has a big indirect influence. The Jones Act states ships moving goods between two US ports must be owned, flagged, built, manned and maintained in the US. Most condensate distilling capacity in the US is on the East Coast. Condensate oil pumped elsewhere needs to be moved to these distillers before it would even qualify for export.

While the Jones Act seeks to keep the US Merchant Marine service robust, it actually does the opposite with respect to the oil tanker fleet. There are too few Jones Act-compliant tankers to actually move substantial oil from the point of origin to refining and distillation hubs-creating a domestic bottleneck. Jones Act tankers' construction costs are roughly double foreign flagged tankers', and the existing tankers tend to be tied to long-established routes for many years. Many are concentrated on the US West Coast, moving oil from Alaska south. They aren't and won't soon be available to move the Gulf Coast condensate to distilling facilities on the East Coast.

Further, even if the rulings allow for more non-traditional distilling methods, developing new infrastructure can take a considerable amount of time. Sure, firms have already begun investing in splitter refineries in the Gulf Coast, but there doesn't appear to be much immediate benefit to profitability given capacity limitations. And getting the infrastructure to supply these projects with oil and chemicals is a relatively long process. Gulf Coast facilities' don't have the capacity to boost this dramatically in the short term, so the amount that can be exported directly in the next year or so seems to be relatively small compared to the overall supply of condensate. At some point, we might have ample infrastructure in place to support grandiose exports, but that doesn't appear to be the case today.

For stocks, the future beyond what's foreseeable doesn't much matter. There are too many variables to address when it comes to exporting oil. Stocks usually look about 12 to 18 months ahead, and over that span these rulings seem to have a very small impact.