There’s a storm coming in the oil sector, and it will be a major one.
As is well-known by now, there is a massive glut of oil and natural gas production in North America thanks to the shale boom. From Texas to North Dakota, producers are chafing at the 30-year-old ban on crude exports, seeking to find ways to export oil to foreign markets that are willing to pay hefty prices for it.
They are getting crafty now. Kinder Morgan Energy Partners LP (NYSE: KMP), for example, has elected to construct mini-refineries that will process some kinds of crude just enough to let it qualify as “refined” fuel so it can be exported. Valero Energy Corp. (NYSE: VLO) and Marathon Petroleum Corp. (NYSE: MPC) are also pursuing similar strategies.
At this moment, ultra-light oil—found in ample quantities in shale rock—appears to be the industry’s biggest hope. It could bring in $40 billion annually in revenue—nearly $10 billion more than what it would were it sold within the U.S.
Bloomberg reports:
“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 comprises around 14 percent of total U.S. crude production, and the focus on this represents the oil industry’s push to get Congress to modify or overthrow the limits imposed on crude and natural gas exports—limits that were set in place long ago.
The shale revolution has changed things, and the government is reacting—last year, it started approving liquefaction plants and LNG export terminals—but it is a slow process. Going from an ultra-conservative energy policy and limited production to free exports of oil and gas is a jarring shift, after all.
In the meantime, companies are trying to find workarounds. Splitters, which are the mini processing units under consideration, can process 300,000 barrels of crude each day, Bloomberg reports. They convert the low-cost condensate into naphtha, kerosene, and other chemically simpler products that aren’t as lucrative as normal gasoline or diesel but that allow for freer exports—thus making things attractive for oil and gas producers.
The main problem with the exports ban is simple inertia. As FuelFix reports:
“We’ve learned for 40 years to talk about energy security as having stuff here and using it here,” noted Michael Levi, a senior fellow at the Council on Foreign Relations. “Sending it somewhere else seems to run against that.”
Currently, the U.S. exports just 40 percent of its crude, or 8.1 million barrels per day (as of last November). Small amounts go to Canada, as the general ban on crude exports doesn’t apply quite as strictly to Canada; BP (NYSE: BP), for example, recently won approval to export some crude to Canada, while Shell’s (NYSE: RDS.A) similar export license just got renewed.
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The problem is that the Canadian market simply isn’t big enough to provide the kind of demand the U.S. oil and gas boom calls for. The general U.S. refining infrastructure is attuned to the high-sulfur dense crude, as FuelFix reports, since that is what we’ve been importing from Venezuela, Saudi Arabia, and other countries for years.
Now the situation has changed very rapidly. Although the U.S. pipeline and refinery infrastructure is making the necessary changes, it’s an extensive process and will take years.
In the meantime, not only is valuable oil and gas being wasted (see flaring, for example), but millions in potential revenue is also being wasted due to the export ban. The light crude that the American shale boom has caused such a glut of simply has to be offloaded—hence the necessity of exports.
So either companies can seriously invest in retrofits across their pipeline and refinery networks or they can continue to focus on imports. Most have chosen the former, while others are mixing some high-sulfur in to allow the refineries to process them—though there is an upper limit to such intentional contamination.
The coming battle will largely be over public perception and the government’s position. After decades of stressing energy independence, the government needs to explain to the nation the changed situation and prove that exports are now a good thing. Only then can all the millions in lost revenue begin to be recovered.
