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Crude Export Barrier Is Permeable, Lawyer Says

It is unlikely that the Obama administration will allow the wholesale export of U.S. crude oil, but there is more wiggle room under current law to allow for incremental and/or targeted export of domestic crude than many realize, an energy lawyer told a Houston audience.

"The crude export landscape is evolving and intensifying on every front, on the regulatory front, policy and commercial..." said Jacob Dweck, a partner with Sutherland, Asbill & Brennan LLP. "...I believe that within the confines of the current law the administration may surprise you with newly found flexibility,"

The Energy Policy and Conservation Act of 1975 (EPCA) forbade exports of U.S. crude but with exceptions. For instance, Dweck said at the Argus America Crude Summit, President Regan authorized exports of crude to Canada under a pre-approved license category. President Obama could do something similar, allowing export to other countries, he said.

Additionally, the Bureau of Industry and Security (BIS), a unit of the U.S. Department of Commerce, can allow exports if they meet a national interest criteria. "...[G]enerally speaking, it is showing there will be no harm to the U.S. as a result of this specific export, coupled with a compelling showing on economic and technological reasons why the exports cannot be reasonably marketed in the United States," Dweck said.

"In both instances, the executive branch calls the shot and exercises discretion."

For Congress to allow exports it would have to amend the EPCA, which Dweck said is not in the cards; however, pro-export lawmakers might have some sway with the administration, if only on the margins, he said.

In the meantime, BIS holds the key to any exit for U.S. crude. Applications for export to the bureau, its deliberations and decisions are all confidential. It operates in a "black box," Dweck said. Categories under which export licenses may be issued by BIS today have not changed in years. To date, the vast majority of licenses granted involve exports to Canada, he said. The requirement is that the U.S. crude must be used or consumed in Canada.

Other allowed exports of crude are from Alaska's Cook Inlet; from the Strategic Petroleum Reserve when an equal quantity of refined product is swapped; and of foreign crude from the U.S. that has not been commingled with domestic production

BIS may issue national interest export licenses on a case-by-case basis; however, volumes cannot be from the Outer Continental Shelf, nor can they have been transported in pipelines that traverse federal lands, according to Dweck.

"Has the BIS issued such national interest licenses to date? It's possible," he said. "It would be logical to assume, however, that there are applications before the BIS on this basis today. Of course again, the process is confidential and not public."

BIS regulations allow for an export in the national interest if it is offset by the import of an equal or greater quantity and quality of crude in the same transaction. "The crux is to be able to demonstrate that the exported crude could not be 'reasonably marketed' in the United States states for 'compelling economic of technological reasons,'" Dweck said.

He would argue that "a compelling showing" could be made for allowing export of very light U.S. crude oil and condensate because it cannot be reasonably marketed in the United states, due to a supply-demand imbalance. There's too much of it, and domestic refiners don't need it, in other words.

"I also believe that BIS is likely to apply the 'economic and technological' criteria to a national interest license application even if it does not involve an import swap," he said.

So existing law and regulations offer more flexibility to allow for exports than is typically reported by the press, Dweck said. "...[W]we are likely to see incremental increases in export in the form of new, limited categories of allowed exports as well as case-by-case license determinations.

The crude export question is politically charged, and a good indicator of anti-export sentiment is the gauge on the domestic gasoline pump. "Relaxation of export restrictions would, in the near term, undoubtedly cause a rise in the price of WTI as it could freely compete with other less-valuable grades on the global market," wrote Fred Beach of The University of Texas at Austin Energy Institute in a paper published this month. "Of course any subsequent increase in U.S. gasoline prices would likely give rise to criticism that U.S. policy is enriching oil companies at the expense of American consumers."

On the other side, the threat of reduced oil production due to stranded supplies would lead to the loss of jobs, Dweck said.

For the near term, Dweck said the most likely exports will be of lease condensate and possibly very light crude oil with API gravity of 50 or higher. Free trade agreement countries or U.S. allies, such as Mexico or South Korea, would be likely export destinations.

Allowing incremental exports would sidestep the policy debate around gasoline prices, domestic security, climate change, etc., Dweck said. Targeted exports would allow the country to address oversupply of condensate and light sweet crude. Meanwhile, officials could monitor the impacts on the domestic economy of the allowed exports.

"I believe this process has already started with creative companies pressing the administration and BIS to allow more exports," Dweck said.

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