Crude oil is crude oil – right? Wrong!

August 19, 2014 By

August 19, 2014

by Barry Schaps

Recently, veterans in the oil industry have been questioning their long held assumptions about what really constitutes crude oil produced at the wellhead. One may ask, with everything else going on in the world, “Why is this important?” The short and simple answer is that “traditional crude oil” (loosely defined as liquid hydrocarbons from underground reservoirs that remain a liquid at atmospheric temperatures) is prohibited from being exported from the U.S. (except to Canada) while products “processed” from crude oil have no such prohibition and can be freely exported.

The current U.S. shale oil boom is producing an over-abundance of “light” crude oil that due to reversals of crude oil pipelines and massive capital expenditures for enhanced transportation logistics is flowing at record levels towards U.S. Gulf Coast (USGC) refineries engineered and built to process “heavy” crude oil from foreign sources. The “lightness” of the crude oil stream can be attributed to the presence of a higher percentage of “condensate” from the wellhead. The creation of lease condensate occurs when it condenses from natural gas at atmospheric pressure and temperature. And herein lies the regulatory conundrum. Wellhead condensate that receives no further processing is considered crude oil that cannot be exported, but condensate that is “stabilized” or “processed” is considered a “refined product” and therefore can be exported.

At the end of June, as first reported by the Wall Street Journal, the Commerce Department’s Bureau of Industry Security issued letters to Enterprise Products Partners and Pioneer Natural Resources permitting them to export wellhead condensate, which shocked the industry and prompted many additional export requests. Industry participants assumed that in order to “qualify” lease condensate for export it was necessary to first run the condensate through a simple distillation tower thereby separating the lighter hydrocarbon gases (like methane, ethane and propane) from the heavier material. However, industry sources speculate that the condensate under review was “processed” by a stabilizer and not a full-blown distillation tower. The planned construction of a number of the newer stabilizers has been announced and they are estimated to be online in 2015. The industry needs additional specific information from the Bureau of Industry Security in this regard.

Surprisingly for Congress, there appears to be little opposition to increasing the volume of crude oil available for export, including condensate. Currently U.S. produced crude oil on the USGC sells at a discount to global market prices because it is backed up in the supply chain system without an ability to export. Should a full or partial ban on exports be lifted, prices of U.S. produced crudes would rise (at least temporarily) but it would also encourage more domestic drilling, creating more jobs, and ultimately reducing the U.S. dependence of foreign crude oil imports. One has to admit, regardless of which side of the political aisle you sit, it makes little sense to approve multi-billion dollar natural gas export facilities on the USGC, while an export ban exists on crude oil still exists.

For further reading, RBN Energy has provided excellent reporting and analysis on this complex regulatory matter, specifically, With or Without Splitting? Changing Lease Condensate Export Definitions and CCats Scratch Fever – Navigating Condensate Exports at the Department of Commerce. Another good resource is the Senate Committee on Energy & Natural Resources’ report, released in April, entitled License to Trade: Commerce Department Authority to Allow Condensate Exports.