Fight over gas exports is a prelude to oil exports brawl

WASHINGTON – The frenzy to sell more U.S. natural gas overseas has sparked a bitter, unseemly skirmish among Big Business that has such heavyweights as Dow Chemical Co. and GE squaring off over the prospect.

But the feuding over natural gas exports is only the opening act for a much bigger battle over whether the United States should start widely selling its oil to foreign customers, upending a decades-old practice of hoarding domestic crude believed to be in short supply.

The struggle is coming soon, driven by a drilling boom in South Texas and North Dakota that has caused U.S. oil production to spike, putting America on track to surpass Saudi Arabia in daily crude harvests by 2020 and prompting predictions the United States will become a net exporter of all energy by 2025.

“We’ve learned for 40 years to talk about energy security as having stuff here and using it here,” noted Michael Levi, a senior fellow at the Council on Foreign Relations. “Sending it somewhere else seems to run against that.”

Exports to Canada

The U.S. still imports about 40 percent of its crude – roughly 8.1 million barrels per day last November – but it has been sending small amounts to Canada for years.

Although oil companies have relatively free rein to sell refined petroleum products outside the United States, a 34-year-old law effectively bars exports of crude as well as other commodities in short supply. But the Commerce Department historically has issued waivers for exports to Canada and oil harvested in Alaska’s Cook Inlet.

BP recently got approval to send some oil to Canada, according to a source familiar with the permit. A Shell Oil Co. spokesman confirmed it recently won renewal of its Canadian export license. And the government has given Valero permission to move “a limited amount of domestic (oil)” from the Gulf Coast to its Quebec refinery, which is set up to process light, sweet crude normally imported from across the Atlantic, said Bill Day, a spokesman for the San Antonio-based company.

Retro fits or imports?

But a growing number of energy experts are warning that the Canadian market isn’t big enough to keep light, sweet oil flowing from the Bakken and Eagle Ford formations, especially since most U.S. refiners are designed to handle dense high-sulfur sour crude instead.

That’s especially true on the Gulf Coast, where refiners are adapted to the lower-quality heavier crudes from Venezuela, Saudi Arabia, Canada and elsewhere.

“Our refining complex is really attuned to medium and heavier crudes,” noted Kenneth Medlock, director of the Center for Energy Studies at Rice University. “And all the stuff coming from the shale is light tight oil. That creates a bit of a problem.”

Faced with a growing glut of sweet U.S. crude, refiners must make a tough choice: Invest billions in retrofits – and count on rail and planned pipelines to deliver the product – or keep focusing on lower-quality imports.

Some U.S. refiners already are planning retrofits to handle light domestic oil. For instance, Valero just announced it would add equipment to its Houston refinery to process more sweet crude from Eagle Ford.

Other refining facilities built years ago to process dense crude have adapted by blending in some low-sulfur tight oil. But there’s a limit to how much they can blend, and bigger changes don’t happen overnight, noted Erik Milito, upstream director for the American Petroleum Institute.

“It takes substantial investment to switch to process light crude,” Milito said. And “the refiners that are set up for (sweet) crude may have supplies already coming in and may not be able to take on more.”

Canadian refineries adapted for sweet crude have been an ideal market, but they could eventually have more than they need. , Milito said. “We have to make sure we maintain the ability to find a market. If you don’t, you’re potentially shutting in production and jobs and revenue and energy security.”

Maria van der Hoeven, executive director of the International Energy Agency, issued a blunt warning in a Financial Times opinion piece: “Some may see this as a choice between keeping American oil within U.S. borders for reasons of economic security and allowing the U.S. to generate billions of dollars in new export revenues. But market realities suggest a far simpler decision ahead: Either U.S. crude is shipped abroad or it stays in the ground.”

That’s a hard argument for the Obama administration or any politician to make, especially as long as the U.S. is still importing some foreign oil.

Lobbying push

For years, politicians have been espousing “meaningless” slogans like “energy independence,” said Guy Caruso, the former administrator of the Energy Information Administration. “Now, they’ve got to go out and explain why they think we have so much of this stuff we now can export it.”

Current EIA administrator Adam Sieminski has been testing the waters, insisting the U.S. would be misguided to reject crude exports “outright.”

Caruso predicts a major oil-industry lobbying push to persuade politicians to toss out the crude export ban.

Politicians and the public “still haven’t really grasped that different supply environment we’re in now,” Caruso said. “They still have the opinions that we’re in a scarce environment and that demand is rising, whereas it’s just the opposite.”

Oil exports also could face fierce opposition from environmentalists concerned about strengthening the U.S. yoke to fossil fuels that produce heat-trapping emissions.

Rep. Ed Markey, D-Mass., a critic of exporting the United States’ natural gas bounty, already has sounded the alarm. In October, he asked the Commerce Department to give him all crude export applications.

The looming fight over oil exports could mimic the red-hot debate on exporting natural gas, with some of the same players staking out similar positions. In both cases, American consumers will be worried about higher energy bills against the backdrop of the industry’s long “boom and bust” cycles.

The gas export fight is already among the most emotionally charged U.S. energy policy debate in decades.

That’s because energy is a security issue for the government and a pocketbook issue for consumers, with reminders of prices at every filling station, Medlock said.

“Name another commodity where the price is on a sign on every corner,” he said. “That fundamentally makes energy different than everything else. You don’t see that with milk, with bread, when you go shopping maybe once a week. (Energy is) on everybody’s mind all the time.”