United States law prohibits exports of crude oil and condensate except under certain conditions, while exports of refined products and natural gas are far less restricted. While these laws had little impact when the country was in a position of oil and gas scarcity, the country’s newfound energy abundance has rendered some of them obsolete, according to Rusty Braziel President of RBN Energy, at the Center for Strategic and International Studies last week.
“The rules that were established to be able to handle the exports of those hydrocarbons were all established back in the shortage days,” said Braziel. And in this new environment of abundance, some of these rules not only inhibit smooth functioning of markets, they are, in some cases, absurd. “In the olden days, these laws and rules didn’t make any difference. Now in a world of exports, they do.”
Exporting Natural Gas
“Methane molecules – essentially natural gas – can be exported based on destination. Canada’s ok, Mexico’s ok, and we can export methane in the form of LNG if it goes out of a terminal which has been approved,” Braziel said.
But while approvals for LNG exports to countries with which the US has a free trade agreement are almost a given, approvals for exports to non-FTA countries require a public interest determination. And the approval process – which has been both prolonged and highly politicized – has been the target of critics who say that “public interest” lacks a specific definition, raising questions about the transparency of the process.
“It looks to me like the rules about what gets approved are a secret,” Braziel said. “If it does get approved, then methane is good for exports.”
Exporting Propane and Butane
Natural gas liquids – which include propane and butane, as well as natural gasoline – are largely free of export restrictions. “Propane and butane molecules can be exported anywhere we want to take them, and that is regardless of the needs of the marketplace,” Braziel said. Propane and butane are known as liquefied petroleum gases in international trading, and can be produced as part of the crude oil refining process as well as from the natural gas stream.
Liquids-focused drilling in unconventional formations has led to dramatic increases in US propane and butane supplies, as well as a wide disparity between US and international prices. Exports have risen dramatically, and a rash of new export projects are in the works for the Gulf Coast. “This month we’ll export 450,000 barrels per day of propane off the Gulf Coast,” Braziel said.
But the US’s liberal LPG export regime may be exacerbating a temporary shortage in the country’s agricultural sector, which uses propane to dry corn after the growing season. “Over the course of the last two to three weeks, governors in seven midwestern states have declared propane emergencies,” Braziel said. A wet end to the growing season this year has led to strong, and unmet, demand for propane.
“This month we’ll export 450,000 bbl/d of propane off the Gulf Coast. It didn’t matter that there was a propane shortage in the midwest. There was not one single rule in place that prevented 450,000 bbl of propane exported off the Gulf Coast.”
Exporting Crude Oil
“Crude oil has a vey convoluted set of molecule laws,” Braziel said. “Crude oil can be exported to Canada as long as the molecules stay in Canada, or if they come from Alaska, or if they come from certain heavy oil fields in California, limited by a specific volume.”
But Braziel pointed out that most crude oil from unconventional formations such as shales is light and sweet.
“Refiners can run some of those light crudes, but they can’t run a lot more because of refinery configurations,” Braziel said. Imports can address some of that imbalance, but “it’s not enough. The US will end up being a bout 500,000-600,000 bbl long light crude oil without enough heavy crude oil to be able to fully load the heavy crude oil units.”
“That situation will persist until either the refineries spend the money in order to be able to run those light crudes, or we could export those light crudes and replace them with heavy crudes. That would work just fine. And then we wouldn’t have to spend the money to correct that imbalance.”
Braziel expects refiners to simply process domestic crude and ultimately export it in the form of refined products. “We don’t need that gasoline in the US, because gasoline demand is flat in the US. Instead of exporting the crude oil, we will export the gasoline.”
Condensate falls under the same restrictions as crude oil, but products that are chemically identical to condensate – but go by a different name – are not. Condensate can be known as natural gasoline, pentanes plus, naphtha or C5s, all of which are used for blending, petrochemicals, bitumen diluent or overseas exports, said Braziel.
“Lease condensate is classified by the molecule laws as crude oil”, whereas “natural gasoline, even though it’s exactly the same stuff chemically, you can export it just fine.”
And something as minor as temperature can mean the difference between restricted and unrestricted exports. For example, when natural gas is produced, it is fed into a stabilizer and separated out into components. ”When it’s hot, more of those condensate molecules percolate up in that stabilizer…and turn out to be natural gasoline. When it’s colder, those molecules stay in the condensate and are sold as condensate,” Braziel said.
“The exact same molecules show up as being exportable or non-exportable solely due to the temperature in South Texas,” said Braziel.