The export ban is keeping U.S. crude prices down
The crude export ban in the United States is often referred to as an antiquated piece of legislation that prevents U.S. light sweet crude oil from reaching international markets. Much of the refining capacity in the U.S. is designed for heavier crudes, meaning U.S. producers need to price their oil at a discount in order to remain competitive, according to recent research from Rice University.
Dr. Kenneth Medlock of the Baker Institute at Rice University published a new study titled “To Lift or Not to Lift?” in which he explored the potential outcomes of scrapping the current export ban. Among his many findings, Dr. Medlock found that there could be “significant incentive for infrastructure development to move crude oil from inland locations to the coasts, even at prices as low as $30 per barrel.”
Based on the API and sulfur content of 30 different crude oils, Medlock and his team found that oils with higher APIs and lower sulfur content when compared to Brent crude should price at a premium to the European benchmark. This highlights that West Texas Intermediate (WTI), which has both a higher API and lower sulfur content than Brent, should price at a premium to Brent while the reality of the market is just the opposite.
The analysis done by Medlock found that selling WTI and other U.S. crude oils in an open international market would help lower the discount necessary to keep them competitive. Lifting the ban would incentivize midstream infrastructure build out to get U.S. light sweet crude to international markets where it could fetch a premium.
“If the ban on crude oil exports were lifted, then no domestic price discount would emerge,” says Medlock. “No additional refining investments would be needed [to process light crude]; rather, the excess light crude oil would be exported.”
Lifting the export ban on U.S. crude oil could incentivize greater midstream investment
The new price for U.S. light crude oil could encourage investment in midstream infrastructure in order to get the crude from inland to export facilities on the coast, says Medlock. “Significant investment capital would flow into pipeline and infrastructure development to get to a location where transport to international markets could occur unimpeded. We see that investment in the midstream would eliminate the discounts that already exist for domestic crude oils, thus providing a price lift in the field for producers.”
Dr. Helen Currie, Senior Economist with ConocoPhillips (ticker: COP), gave a presentation in Denver at the Energy Finance Discussion Group monthly breakfast also advocating for the end of the export ban. While Dr. Currie agreed that the time to export is now likely here, her outlook for midstream investment was more conservative. When asked after her presentation for her thoughts about future investment in the midstream sector if the ban is lifted, Dr. Currie told Oil & Gas 360® there will likely be more investment into midstream, but there will not be a boom in new investment.
Dr. Currie mentioned a report by Turner, Mason & Company (commissioned by ConocoPhillips), an engineering consulting firm, revealed the United States could regularly export light sweet crude by 2017 if the ban were to be repealed. The U.S. is also home to 62% of the world’s working coking capacity, making it will equipped to ramp up for light crude exports.
Although critics of the export ban describe it as “a relic of flawed policy,” Dr. Currie and her colleagues at ConocoPhillips are not optimistic of the embargo being pulled. At a recent Analyst Day, Ryan Lance, President and Chief Executive Officer of COP, gave the odds of the ban being lifted in 2015 at no more than 30%. Currie was less optimistic, saying that she did not believe there was any chance of the ban being lifted under the current administration.
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
