U.S. Advises Oil Companies How to Break The Law, Approves LNG Despite Fracking Fallacy Debate

Posted in The Petroleum Truth Report on January 2, 2015

In the waning hours of 2014, the U.S. government slipped a few things past us:

  • It advised oil companies how to get around the law prohibiting crude oil export by “self-classifying” crude oil as “not crude oil”, and 
  • Approved an LNG export facility despite the Fracking Fallacy debate that suggests that the U.S. may not have enough natural gas to meet our own demand in a few years much less send gas to the rest of the world.

On December 30, 2014, Reuters reported that the U.S. Commerce Department’s Bureau of Industry and Security advised oil companies that they could self-classify their light tight oil and condensate as “processed condensate” and legally evade the ban on exporting crude oil.  Crude oil export has been illegal since 1975 when President Ford signed the Energy Policy and Conservation Act (EPCA). The idea behind the legislation was to keep domestic oil in the U.S. as a strategic buffer against the global oil price fluctuations created by the embargoes of 1967 and 1973.

I do not support the ban on exporting crude oil but it is the law.  Congress should debate the law and vote whether to keep or repeal the law. The Department of Commerce has given the oil companies a “wink” letting them know it would be OK to export their light oil if they just call it something else. Isn’t it is illegal to advise people how to get away with breaking the law?

Oil companies have been calling for reversal of the EPCA since early in 2014 arguing that surging U.S. production from shale has fundamentally changed the conditions that lead to the ban on exporting crude oil.  When the EPCA was signed, the U.S. was producing 8.3 million barrels of oil per day (Mmbopd) and production was falling.  Today, production is 9.0 Mmbopd and increasing.

The real issue, however, is that most U.S. refineries are not designed to process the light tight oil produced from the Bakken and Eagle Ford shale plays.  It has a lower specific gravity than ordinary crude oil (WTI–West Texas Intermediate is the standard for the U.S.) and must be blended with heavier oil from Canada, Mexico or Venezuela so it can be refined into diesel, gasoline, jet fuel and other products which may be legally exported.

This, by the way, is the real reason for the Keystone XL pipeline from Canada. It would bring super-heavy crude oil from the tar sands in Alberta that would be perfect for blending with light tight oil.  President Obama is right when he says that little of this Canadian oil would be used in the U.S.  He is dead wrong, however, when he says it would not benefit the U.S. because it would increase refining jobs and U.S. exports, and lower U.S. gasoline prices–all good for the economy.  

Diesel is the cash cow among refined products because it is in high demand in overseas markets.  Gasoline is a more-or-less unwanted by-product of producing diesel and that is why the price of gasoline has been going down in the U.S. since the rise of light tight oil production.  A surplus of gasoline forces its price down.

So, the ban on crude oil exports is good for American consumers because it maintains and creates refining jobs, helps with our balance of trade and lowers the cost of gasoline.  Allowing oil exports would streamline the process for oil companies since they would not have to bother with the refining step but would mean that most of the refining of U.S. light oil would be overseas which would not be as good for the U.S. consumer.

If President Obama is against the Keystone XL pipeline, it makes sense that he is for exporting crude oil but he won’t say that because that would put him in the same camp as the oil companies.  He has, therefore, cast the Keystone XL as an environmental issue saying that the U.S. should not promote the “dirty” process of tar sand mining and extraction in Canada.  I’m going to stay out of that discussion but I doubt the Canadians are going to abandon the tar sands because their neighbor does not approve a pipeline.

Obama clearly favors taking a regulatory approach to complex problems instead of the more cumbersome process of passing or repealing laws.  It is wrong to offer oil companies a regulatory solution that borders on illegality when it would be right to debate the Energy Policy and Conservation Act and reach a clear course of action.

Also in the last minutes of 2014, FERC (Federal Energy Regulatory Commission) approved Cheniere Energy’s request to build its Corpus Christi LNG (liquefied natural gas) Terminal in southern Texas.  Other LNG export facilities were previously approved but this is the first green-field facility to be authorized.  Its cost will be approximately $12 billion.

The timing of this approval is wrong because of the Fracking Fallacy debate that casts doubt on future supply of natural gas in the United States.  The government should postpone decisions on new export licenses until the present debate on supply is resolved or at least better defined than it is today.

Ironically, Oklahoma billionaire George Kaiser’s company Excelerate Energy announced that it will postpone its floating LNG terminal planned near Cheniere’s Corpus Christi project.  The main reason appears to be questionable economics now that oil prices have fallen–most overseas LNG contracts are linked to oil prices. The difference between Excelerate’s decision and Cheniere’s decision seems to be about George Kaiser spending his own money versus Cheniere spending other people’s money.

I do not support banning LNG export although I think it is a profoundly bad idea based on economics and likely higher natural gas prices in the U.S. once shale gas supply peaks near the end of this decade.  It is inappropriate, however, for the government to move forward with approvals while the Fracking Fallacy debate about future gas supply is high on the national energy agenda.