U.S. Crude Oil Ruling Seen Opening Niche Export Markets

A U.S. ruling allowing limited
exports of lightly processed oil may permit the equivalent of
3.6 percent of U.S. crude to be sold on international markets
this year, according to Citigroup Inc.

About 300,000 barrels a day of an ultra-light oil known as
condensate could be exported by the end of the year, Citigroup
said. In total 750,000 barrels a day of condensate is pumped
from U.S. shale plays, according to Wood Mackenzie Ltd. Exports
would give U.S. producers access to niche markets in Asia and
Latin America, while having only a small impact on the price
domestic refiners pay for crude, according to Steve Sawyer, an
analyst at FGE, an energy consultancy.

“Limiting it to condensates is a bit of a win-win for
everybody,” Sawyer said by phone yesterday from London.
“Condensate gives a bit to the producers without really
impacting the refiner. Compromise, one might say.”

The U.S. Commerce Department opened the door to more oil
exports after Pioneer Natural Resources Co. (PXD) petitioned for
approval to ship condensate from the Eagle Ford shale in Texas
that has been stripped of gases to make it less volatile, a
minimal level of processing known as stabilization. Condensate
has been abundant in shale formations during the drilling boom,
leading to at glut on the Gulf Coast.

“This is definitely not a game-changing shift in policy
which would open the floodgates on exports,” Greg Priddy,
director of global oil at New York-based researcher Eurasia
Group, said in an e-mailed note. “Only a portion of U.S.
condensate production undergoes this sort of initial processing,
and the volumes which will be freed up for export under these
ruling will be modest.”

Asian Markets

Condensate exported from the U.S. would probably appeal to
buyers in China, Japan and South Korea as a feedstock for
gasoline and petrochemical production, according to Ehsan Ul-Haq, senior market consultant at KBC Energy Economics.

“There’s certainly interest in Asia,”Ul-Haq said by
phone yesterday from Walton-on-Thames, England. Europe doesn’t
need more condensate because it increases yields of gasoline,
which the region already produces in surplus, he said.

Buyers in Venezuela, Brazil or Mexico might also purchase
U.S. condensates to blend with domestically produced heavy
crudes to yield more high-value gasoline and diesel, although
they may only need small volumes, said Sawyer.

The U.S. has restricted most crude exports since 1975, in
response to the Arab oil embargo. Shipments to Canada are an
exception, and those averaged 246,000 barrels a day in March,
the highest level since April 1999.

Litmus Test

“There’s been no change to our policy when it comes to
crude oil exports,” White House spokesman Josh Earnest told
reporters at a briefing yesterday.

Any oil that has been processed through a distillation
tower of the kind Pioneer uses to stabilize its condensate is no
longer defined as crude, and therefore is eligible for export,
Jim Hock, a U.S. Commerce Department spokesman, said in an e-mailed statement June 24.

This decision over what was previously considered a “gray
area” will gauge the global market’s reaction to a potential
expansion of U.S. crude exports, David Wech, managing director
at JBC Energy GmbH, a researcher in Vienna, said in an e-mail.

The U.S. pumped 8.45 million barrels of oil a day in the
week to June 20, according to U.S. Energy Information
Administration data. The Eagle Ford shale produced 205,000
barrels a day of condensate in the first quarter, according to
data from the Railroad Commission of Texas. Pioneer Natural
Resources pumped about 29,000 barrels a day of oil and natural
gas liquids from the formation over the same period, according
to a presentation on the company’s website.

The Pioneer ruling will be “a litmus test for the market
in terms of how wide definitions are stretched and the window
for exports is opened,” Miswin Mahesh, an analyst at Barclays
Plc in London, said by e-mail.

To contact the reporter on this story:
Lananh Nguyen in London at
[email protected]

To contact the editors responsible for this story:
Alaric Nightingale at
[email protected]
James Herron