On Wall Street

February 8, 2013 5:08 pm

US crude exports argument needs refining

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President Barack Obama wants to double US exports. Will these include crude oil?

This question, absurd until recently, is becoming serious. The US may still be a huge crude importer but rises in domestic supplies are shutting out millions of foreign barrels. This week the head of the International Energy Agency – a group that looks after western nations’ energy security – pointedly warned the US oil boom will end if Washington fails to lift its ban on most crude exports.

And Lisa Murkowski, the senior Republican on the Senate energy and natural resources committee, declared: “All agencies should review policies affecting energy exports and remove unnecessary impediments. Energy exports are good for our economy.”

The impending fight could overshadow current arguments over US exports of liquefied natural gas. Politicians, businesses inside and outside the energy industry and environmentalists will join the fray – with high stakes for investors.

Exports would shuffle the boom’s winners and losers. Refiners, the weaklings of the oil patch a few years ago, have reaped windfalls buying oil at depressed US prices and processing fuel for sale at higher international prices. In the past two years the S&P 500 refining and marketing index, composed of stocks such as Valero and Marathon Petroleum, had total returns of 90 per cent.

The companies drilling the oil have not been so fortunate. Daily US crude production has risen by 1.3m barrels in the past two years, reaching a 19-year high of 6.9m barrels a day. Yet shares of exploration and production companies lost 2.4 per cent.

Most new output is high-quality, low-sulphur crude from states such as North Dakota and Texas. Many US refineries are set up to process heavier, lower-quality crude. Others sit far from pipelines so can be served only by costly trains and US-flagged tankers.

“It may make sense to export a certain type of oil that you don’t have refinery capacity in a locality to be able to use,” says John Felmy, chief economist at the American Petroleum Institute, a lobbying group whose members include Chevron and Exxon Mobil.

Refiners see it differently. They say they are adjusting to handle the new supplies. At Valero, high-quality sweet crude used to be a third of its feedstock, a spokesman says. Now it’s about half. To capture some of the stunning output from the Eagle Ford shale in Texas, Valero built a truck terminal at its nearby Three Rivers refinery. It plans to buy 2,000 railway tank cars this year to collect more cheap inland crude.

It has also received permission to export some US crude to a Valero refinery in Quebec, Canada. But the spokesman suggests untrammelled US exports would be a bad idea: “It actually makes more sense to keep the oil here and refine it at a low cost and then export products.” Valero has been central to the US’s emergence as a top global diesel and petrol exporter.

Exports of crude are much more politically sensitive than products. Shipments are effectively blocked to everywhere but Canada. But the restrictions, which date to the late 1970s, were irrelevant until now.

Maria van der Hoeven, IEA executive director, argued in the Financial Times that the US needs to loosen export restrictions lest weak oil prices force drillers to give up on exploration.

This seems improbable. Producers in North Dakota have found customers in states as far away as New Jersey despite high delivery costs. An easier fix to the refinery mismatch might be to let cheaper foreign tankers carry oil to the east coast.

Further, environmentalists will argue, selling extra light crude abroad will simply feed demand for the heavier – and from a global warming perspective, more dangerous – oil poised to flow on the proposed Keystone XL pipeline from Canada.

But there is another reason why enabling crude export makes sense, says Bill Reinsch, former undersecretary for export administration at the US Department of Commerce. The US is leaning on allies to stop buying Iranian crude amid sanctions over the Islamic Republic’s nuclear programme. “It’s hard to tell them, ‘Don’t buy from Iran,’ and then deny them an alternative source,” Mr Reinsch says.

The arguments are still at a crude stage. Expect sharp refinements.


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