On December 30 the Commerce Department shifted the oil export landscape as it had existed for 40 years, with only a little administrative sleight-of-hand.
Background – The History of Oil Short Supply Controls
In 1973, the member countries of OPEC implemented an oil embargo against the United States. The embargo caused the price of a barrel of oil to quadruple and led to an oil and gas shortage and even gas rationing in the United States. In response, the United States placed crude oil on the “short supply” section of the Commerce Department’s Commerce Control List.
Since that time, restrictions on the export of crude oil have remained in place and, though the constraints have been eased slightly, have held back would-be exporters by requiring that crude either be refined into a petroleum product or be authorized by the Government in order to be exported.
A New Domestic Boom
Today, U.S. domestic production of crude, particularly from the Bakken shale formation in the northern Great Plains, has skyrocketed. Although the U.S. is still a net oil importer, the increased domestic production has already sent oil prices plummeting and may create a glut in the market in 2015 and 2016. Perhaps recognizing this potential issue, BIS may have signaled its upcoming moves on oil export policy with two surprising commodity classification rulings issued to Pioneer Natural Resources and Enterprise Product Partners. In those rulings, BIS stated that lease condensate, an item specifically listed in the definition of crude oil, when lightly processed, would not be considered subject to the short supply controls.
The Little Move
Then, at the end of last year, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) significantly reduced the 40-year old export restriction and did so with only a minor “clarification” of the rules. No act of congress, no executive order, just a simple Frequently Asked Questions sheet released on the BIS website may have changed the way American oil exporters have done business for decades.
The FAQs include an answer to the question to what extent mush crude oil be processed in order to be considered a “petroleum product” that may be exported without BIS authorization. The answer, BIS explains, is that there must be “material processing” – that is, more than de minimis processing – “through a crude oil distillation tower.” In order to determine whether material processing has occurred, BIS lists six factors (noting that the list is not exhaustive) as follows:
(1) Whether the distillation process materially transforms the crude oil, by using heat to induce evaporation and condensation, into liquid streams that are chemically distinct from the crude oil input;
(2) The change in API gravity between the input of the process and the output of the process;
(3) The change in percentage of different types of hydrocarbons between the input and output of the process;
(4) Whether the streams resulting from distillation have purposes other than allowing the product to be classified as exportable petroleum products, such as use as petrochemical feedstock, diluent, and gasoline blendstock;
(5) Whether the distillation process utilizes temperature gradients and has significant internal structures, such as trays or packing, and differentiated output streams;
(6) Whether the distillation uses towers with more mechanical complexity and heat, higher residence time, internal structures that promote condensation and better separation, and a consistent quality liquid streams (also called cuts or fractions) than equipment used to separate vapors and liquids for transportation needs.
The Big Shift
It is not yet clear how much U.S. crude oil might be “materially processed” and exported without a license under these new clarified regulations. However, oil industry players are a competitive bunch and will not be slow to take advantage of the new potential openings for doing business created by this BIS announcement.
However, even with BIS published guidelines in hand, companies must analyze products for export and the application of export controls to those products on a case-by-case basis. Substantial civil and criminal penalties apply to persons who commit unauthorized exports of restricted products. However, with sound analysis and advice from experts, U.S. oil exporters may enjoy benefits from opportunities made possible by this one weird trick.