Move carefully on crude exports, refiner urges House subcommittee

Tight oil formations have helped the US increase its crude production dramatically, an independent refiner conceded. But the nation should proceed cautiously as it considers authorizing more crude exports, he told a US House Foreign Affairs Committee subcommittee.

“For decades, this country has worked to become energy secure or even energy independent, and now just recently, the expansion of production from both traditional and non-traditional sources has allowed the country to make great progress toward that goal,” said Michael Jennings, chief executive of Houston-based HollyFrontier Corp., on Apr. 2.

Higher US crude production also has reduced refined product costs for consumers, and has mitigated price volatility or prices that historically resulted from geopolitical events, he continued in testimony to the Terrorism, Nonproliferation, and Trade Subcommittee.

“Given the great progress made in the last several years and the continued uncertainty in the global marketplace, HollyFrontier does not believe that lifting the historic ban on crude oil exports is in the best interest of our citizens or our national security,” Jennings said.

But other witnesses argued that increased US crude exports would provide more benefits than problems for the country. “Today, America is producing nearly 50% more oil than we did in 2008,” said Erik Milito, the American Petroleum Institute’s upstream and industry operations director. “By 2015, the International Energy Agency predicts the US will surpass Saudi Arabia and Russia to be the world’s top crude oil producer,” he said.

Milito continued, “This is a new era for American energy, but our energy trade policies are stuck in the 1970s. The US and China are the only major oil producers in the world that don’t export a significant amount of crude. It’s time to unlock the benefits of trade for US consumers and further strengthen our position as a global energy superpower.”

Current exports

US crude exports now are limited to production from state waters in Alaska’s Cook Inlet, Alaskan North Slope crude, certain US-produced crude destined for Canada, shipments to US crude territories, and California crude sold to Pacific Rim countries, according to the US Energy Information Administration.

Canada currently is the only US crude export customer, with purchases climbing from 2.1 million bbl in August 2013 to 7.6 million bbl in January, its latest figures indicate.

Jennings noted that while EIA projects US crude production will rise to 8.5 million b/d this year from 7.5 million b/d in 2013, it would still only be half the nation’s 17 million b/d of refining capacity. Those who support lifting the ban on US crude exports argue that such a move would reflect a move toward a freer market in total global supply, he said.

But national oil companies control about 85% of the world’s crude and 58% of its production, Jennings continued. “In addition to these figures, and equally important to global prices, oil exports by the Organization of Petroleum Exporting Countries constitute approximately 60% of the total petroleum traded internationally,” he said.

“Though American production has increased dramatically, it has not yet matured to the point at which it could significantly impact the price of crude in the global market,” the refining executive said. “Lifting the crude export ban without dramatically revising other impediments to free trade which include the Renewable Fuels Standard, the Jones Act, and fiat-style exclusions on import-oriented infrastructure will come at the detriment of the American consumer, and American jobs.”

Milito said API released a study by ICF International and EnSys Energy earlier in the week that concluded that additional exports could help increase supplies, put downward pressure on the prices at the pump, and bring more jobs to America (OGJ Online, Mar. 31, 2014).

“Harnessing these benefits, however, will require lawmakers and regulators to reexamine policies that were enacted long before the US transitioned from a period of energy scarcity to one of energy abundance,” he added.

Stranded crude impacts

“In the long run, any oversupply of unrefined crude may create a disincentive to produce more energy here at home,” Milito said. “But if oil can flow to the global market, this study shows that then you begin to see higher global supplies, more production, and consumer-level benefits—as well as more American jobs.”

Free trade also increases efficiency, he asserted. Noting the US increasingly produces light, sweet crude, he said it might make sense to import a surplus of it from one region and import cheaper, heavy oil in another instead of shipping the more expensive higher grade cross-country.

“This is especially true in the absence of sufficient infrastructure to efficiently transport crude to the refineries that could use it,” said Milito. “But export restrictions effectively insulate consumers from the positive benefits of efficient markets.”

US Sen. Lisa Murkowski (R-Alas.), who also testified, agreed that lifting the US crude oil export ban would boost US production and improve global markets. “I believe the [US Department of Commerce] retains the authority to modernize its regulations and update its 30-year-old definition of ‘crude oil’ in such a way as to facilitate exports of condensate,” she told the subcommittee.

The department has taken such steps in the past, said Murkowski, who is the Energy and Natural Resources Committee’s ranking minority member. “During the era of price and allocation controls, California started to shut in production for a variety of competitive and regulatory reasons,” she said. “Commerce authorized a temporary export program of residual fuel oil to protect this production. When an oversupply of butane—a glut—was created in the Gulf Coast, additional exports were also authorized by Commerce.”

US President Barack Obama also retains authority to approve limited crude exports, which predecessors from both parties have used in the past, Murkowski added. Congress gave the president that authority to address crude exports in the national interest, she said. “At the end of the day, I am fully prepared to introduce legislation if necessary—but because legislation takes time we may not need to spend, I remain hopeful that we may have a willing partner in the administration,” Murkowski said.

‘Far more complex’

US crude exports are part of a broader North American energy picture that needs to be considered, two other witnesses suggested. “Managing America’s newfound oil abundance will require careful choices,” said Deborah Gordon, a senior associate at Carnegie Endowment for International Peace’s Energy & Climate Program. “The situation is far more complex than those who favor or oppose the export ban suggest. Given the US can already export an unlimited amount of petroleum products, a question should be how much crude oil exports should be allowed,” Gordon said.

Kenneth B. Medlock III, senior director at the Center for Energy Studies at Rice University’s James A. Baker III Institute for Public Policy, meanwhile, noted, “If you pinch or constrain one market, the arbitrage opportunity will move downstream. That’s exactly what we’ve seen. We have a products market that’s internationally fungible.”

Medlock said, “Beyond what might happen to gasoline prices, we’d be moving more light sweet crude onto global markets and putting downward pressure on prices. It’s difficult to predict what would happen because it’s impossible to tell what OPEC and other players would do in response.”

It’s also a domestic infrastructure issue, Medlock indicated. “Currently, we move more Bakken crude by rail than pipeline,” he said. If you actually had the pipeline infrastructure, the crude price would be $20 higher.” Philadelphia area refineries are configured to process Bakken and Eagle Ford crude, but would be at risk if exports were allowed, he said.

Refiners also are adjusting some plants’ configurations. “BP is building the first splitter unit in Houston that can handle both light and heavy crudes,” Gordon said.

“Inside every heavy oil refinery is the capability to refine light crude,” added HollyFrontier’s Jennings. “There’s a lot of investment being made in things such as condensate splitters. We have one in Cheyenne which originally processed heavy Canadian crude exclusively, but now runs 50% Bakken Light and 50% heavy.”

Contact Nick Snow at [email protected].