After 40 Years, Can Oil Companies Now Circumvent U.S. Export Ban?

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Nearly 40 years ago — following the 1973 Arab oil embargo, which caused an energy crisis in the United States — Congress enacted the Energy Policy and Conservation Act of 1975, directing the president to ban exports on domestic oil except in select circumstances. Those exceptions include crude oil drilled in Alaska’s Cook Inlet, oil that goes through the Trans-Alaskan Pipeline, oil shipped to Canada, and so-called heavy oil from certain fields in California. Re-exporting foreign oil and small swaps with Mexico are also allowed. But in total, all these exceptions added up to just 67,000 barrels of oil exported per day in 2011. Meanwhile, U.S. companies can export coal, gasoline, and, in some cases, natural gas.

But with the United States producing more oil than it has in decades, oil companies as well as lawmakers are beginning to argue that it is time to overturn that ban. In a January speech at the Brookings Institution, Republican Sen. Lisa Murkowski of Alaska called on the Obama administration and Congress to loosen restrictions on crude oil exports so that domestic production can grow. “We need to act,” she said, “before the crude export ban raises problems and hurts American jobs.” But other senators, like Democrat Robert Menendez of New Jersey, have argued that the ban was put in place to protect U.S. consumers from volatility and price spikes, and so lifting the ban would expose U.S. consumers to more expensive gasoline prices. Environmental groups are against lifting the ban, as well.

There is little consensus on the issue, and the U.S. government is not likely to act soon, leaving oil companies like ExxonMobil (NYSE:XO), ConocoPhillips (NYSE:COP), and Continental Resources (NYSE:CLR) campaigning. “The world needs the crude,” ConocoPhillips CEO Ryan Lance said in November during a speech extolling the benefits of oil exportation. “And there are places where we could export that crude into existing refineries.” But until the ban is repealed, BP and its peers are working out a strategy to circumvent it.

BP’s (NYSE:BP) decision to sign a 10-year contract to use at least 80 percent of the capacity of a new $360-million mini-refinery in Houston, Texas, is just the beginning. These units cost approximately one-tenth as much as  a full-scale refinery. The growing supply of U.S. oil has created demand in the industry for plants capable of refining raw crude into exportable products, like propane, in a single step, and that demand has launched a wave of new construction along the Gulf Coast.

If these types of one-step plants reach critical mass, the debate over whether to lift or ease the ban on oil exports could be moot for energy companies like BP, ConocoPhillips, and Exxon Mobil. As ITG Investment Research chief energy economist Judith Dwarkin has said, it is “a relatively inexpensive way around the export prohibition.” Companies “can lightly ruffle the hydrocarbons and they are considered processed and then they aren’t subject to the ban,” she explained to Bloomberg. The ban allows for products refined from oil to be sold overseas.

Of course, these refined products will be able to sold to a variety of domestic markets, too.

According to Bloomberg, the first one-step refinery unit will be built by Kinder Morgan Energy Partners (NYSE:KMP) for BP. The 100,000 barrel-per-day crude processing plant is scheduled to come online in July, with three additional plants proposed by other energy companies. Valero Energy (NYSE:VLO) and Phillips 66 (NYSE:PSX) have also considered commissioning facilities. Simply put, “the export of refined products is increasingly in vogue,” Kinder Morgan Energy Partners Chief Executive Rich Kinder told analysts on a January 15 conference call. “We’ll be able to continue to benefit from what we see is a significant trend.”

For BP, the one-step refinery design will help the company in “creating more valuable products or getting to where we could export,” Ronald McClain, president of products pipelines, said to Bloomberg. More specifically, the facility will allow BP to sell oil both abroad and to the United States, and this access to the Gulf Coast market will enable the company to do business with customers it lost when it sold its 450,000 barrel-per-day refinery in Texas City, Texas, to Marathon Petroleum (NYSE:MPC) last year

Creating more valuable products for BP is essential. To cover the costs of the cleanup, legal expenses, and victim compensation stemming from the 2010 Gulf of Mexico oil spill, assets worth $40 billion were sold, causing the company to lose one-fifth of its pre-2010 earnings power. That dropped BP from second-largest oil company by assets to the fifth. Even as recently as the fourth quarter of last year, the lasting financial effects of the oil spill were evident. Now, as a smaller company, it pumps less crude, and as a result of its post-oil spill downsizing, its profit and revenue both declined in the final three months of 2013.

But for other oil producers like ConocoPhillips, this new type of refinery solves one of the largest challenges of drilling for oil in the United States. The more companies produce, the cheaper oil prices become because the U.S. oil market is limited. Comparatively, refined oil products like gasoline can be exported abroad to overseas markets. This means that refiners have benefited much more from the renaissance in U.S. oil production, while oil drillers have had to deal with the glut of domestic oil that has depressed prices.

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