Swaps could be next way around oil export ban

The sun sets on a drilling rig in Frio County, Texas.  (Jerry Lara/San Antonio Express-News)

The sun sets on a drilling rig in Frio County, Texas. (Jerry Lara/San Antonio Express-News)

WASHINGTON — Energy companies are looking closely at another way to export some of the crude pouring out of Texas wells, despite a longstanding ban on selling U.S. oil overseas.

Fresh from winning approval to export processed condensate, they now are seeking government approval to exchange U.S. crude for foreign oil.

The tactic is another way oil companies can work within the 39-year-old export ban — rather than wait for Congress or the Obama administration to spike it altogether — to find new foreign customers for light, sweet U.S. crude beyond the domestic refineries currently ill-suited to process it.

Analysis: Oil export ban can be lifted piecemeal

A leading Republican senator has argued in favor of such exchanges and Oklahoma City-based Continental Resources has asked the Obama administration to approve one such transaction. But oil companies and traders interested in the deals must overcome major market and regulatory obstacles that make them nearly impossible to pull off.

Jacob Dweck, a partner with the Sutherland, Asbill & Brennan law firm who represents many companies in the oil export space, said swaps of crude exports for equal imports of oil into the U.S. are a possibility under current rules and “the government may well show reasonable flexibility in granting them.”

“Because swap licenses are reviewed on a case-by-case basis, they provide the administration with latitude to examine then-current market conditions in determining whether to allow an export, including oil price and the balance between U.S. production and domestic capacity to refine it,” Dweck said. “This case-by-case approach also allows the government to continually assess the cumulative effect of swaps on the US market and prices, and at least in theory approve or not approve the next swap.”

Political pressure

The flexibility for regulators and the potentially low profile of such crude exchanges could be a political asset for the White House, which is viewed as wary of wading deeper into the politically charged debate over oil exports before the November elections.

The existing ban on crude exports is not absolute; it already makes exceptions for oil sent to Canada and supplies from Alaska and California. For example, Valero Energy Corp. holds a government license to send Eagle Ford crude from Texas to its refining operations in Canada.

Refined petroleum products, including gasoline, diesel and now, minimally processed condensate, also can be sold overseas and are not covered by the oil export ban. The Commerce Department’s Bureau of Industry and Security recently told two Texas companies that once condensate, an ultra-light oil, had been stabilized and lightly distilled, it could be considered a petroleum product free to export.

Read more: Export move deals blow to some Gulf Coast refiners and processors

Existing policy provides additional openings.

Federal regulations say the bureau will consider other kinds of applications to export crude on a case-by-case basis, including temporary exports, exchanges with adjacent countries, and swaps that will directly result in the U.S. importing an equal or greater quantity and quality of crude and can be proved to involve supplies that “cannot reasonably be marketed in the United States.”

Sen. Lisa Murkowski, R-Alaska, has argued that the marketing provision could apply to light sweet crude, which could eventually overwhelm current U.S. refiners’ capacity to process it.

Frank Verrastro, a senior vice president at the Center for Strategic and International Studies, said the provision opens the door for a highly targeted proposal to export light crude.

“If someone put in a well-thought out application that said ‘I’ve got this specific type of crude oil, this is my economics, I can’t move it, no one will take it’ — that it’s unmarketable by that definition — it’d go,” Verrastro predicted.

Opposition: Democrats challenge administration’s move on oil exports

Most of the public focus so far has been on broader swaps that may have to satisfy the specific quality, quantity and marketability requirements outlined in export regulations. But Murkowski, who is in line to take the gavel of the Energy and Natural Resources Committee if Republicans takes control of the Senate, issued a paper prepared by panel staff in May touting the potential for more limited barrel-for-barrel oil exchanges with adjacent countries.

“Adjacent” countries historically have included Canada, Panama, and Mexico, but the paper suggests a more liberal interpretation could include other Latin American and Caribbean nations.

“The way the regs are written, people have tended to overlook these exchanges as a possible mechanism,” Murkowski spokesman Robert Dillon said. “The universe of options here is pretty vast. I wouldn’t rule out anything.”

Still, exchanges with nearby nations and broader swaps are complex deals — possibly involving customers and suppliers in more than one other nation — and traders have had trouble making the financials work.

Cumbersome process

Even if they could square the numbers, would-be oil exporters may have to assemble a deal — complete with signed purchase agreements — before asking the Bureau of Industry and Security for permission to conduct the transaction. The potentially cumbersome, slow-moving review process does not mesh with the swift decisions markets and buyers may want.

“This could present a serious commercial challenge: having to negotiate the deal and hope the government would bless it,” said Dweck, the Sutherland lawyer. “It’s hard to see how the industry can function effectively under such a regime, where every time they want to export crude, they have to go to BIS and give them all the signed contracts and wait for weeks to see if the deal would be approved.”

For broad oil swaps that go beyond adjacent countries, there’s another big legal restriction: a prohibition in a U.S. law known as the Mineral Leasing Act that bars any exported crude from being transported on pipelines that cross federal land without a presidential waiver or declaration.

Insurmountable obstacle

That could be an insurmountable obstacle for oil producers in North Dakota, Colorado and other Western states, which, unlike their counterparts in Texas, are surrounded by federal land and served by pipelines that are virtually guaranteed to have crossed the territory.

Just confirming whether a pipeline runs afoul of the Mineral Leasing Act restrictions is difficult, as there is no single registry. Dweck said his firm has done a great deal of detective work trying to identify MLA pipelines, since searches of federal databases often don’t yield clear, meaningful results. He calls the restriction against using MLA pipelines a “sleeper killer” for swap exports.

Continental Resources, one of the biggest Bakken producers, could be looking to get around the pipeline prohibition by turning to rail to transport any North Dakota crude it aims to export. But details of the company’s swap application have not been disclosed, and it is not clear whether BIS is still considering it. In early June, a Continental spokeswoman confirmed a swap application was pending, but when contacted Tuesday, she declined to comment.