This is the second post in a two part series on U.S.-Korea energy cooperation. The first post can be found here.
By KEI President and CEO Donald Manzullo, J.D.
On December 30, 2014, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce, which regulates the exports of certain sensitive items from the United States, gave a gift to U.S. and Korean energy producers and consumers. Ever since 1975, when Congress enacted the Energy Policy and Conservation Act in response to the Arab oil embargo by the Organization of Petroleum Exporting Countries (OPEC), the U.S. has imposed a ban on crude oil exports to protect its national security interests. At the time, it made little sense to export U.S. crude oil, particularly after the contentious debate to construct the Tans-Alaskan oil pipeline just two years earlier, only to increase U.S. dependency on imported oil from unstable or unfriendly regimes.
However, now the tables are turned on OPEC. As a result of the technological revolution in “fracking” and horizontal drilling, the U.S. has reversed its decades-long decline in domestic oil production. Thus, many policymakers are questioning the rationale for the U.S. export ban on crude oil exports and some are calling for its outright repeal.
An outright repeal of the ban on crude oil exports would require an act of Congress. With divided government, it is not clear that this proposal would clear all the hurdles to become law.
However, there is an interim step. Not all oil production in the United States comes in the form of crude oil. While there is a ban in crude oil exports, there is no ban on petroleum exports. While this may seem to be a semantic difference, petroleum is a “value-added” processed product. It is similar to the difference between wheat as a commodity versus bread made from wheat.
There is one type of oil product called condensate, which is a liquid oil formed at the surface from the incidental gas produced in a conventional oil well or dry natural gas well. Condensate is easily formed from shale production. About 12 percent of all oil produced in the U.S. is condensate.
The issue has been whether condensate is crude oil or a petroleum product. If it is a petroleum product, then it is not subject to the oil export ban. Last June, BIS issued a commodity classification decision to two private companies that agreed with them to permit the export of their ultralight condensate petroleum products without the need for an export license. Word got out about this individual ruling and several media outlets thought that the oil export ban had been lifted. This caused much confusion over the past several months because BIS believed it was simply reiterating existing policy that retained the crude oil export ban but allowed the export of petroleum products without the need for prior U.S. government approval through an export license.
As a result, BIS issued a clarification last week through the unusual method of publishing a “Frequently Asked Questions (FAQS)” which is generally used to guide readers of the basic facts of an issue, on its website with respect to administration policy regarding condensate exports. In short, BIS made it absolutely clear that condensate exports are not covered by the U.S. crude oil export ban and can be freely traded without the need to receive an individual export license. In its FAQS, BIS essentially reaffirmed its June ruling to the two private companies that condensate morphs from crude oil to a “petroleum product” like refined oil if it is “processed through a crude oil distillation tower.” (See www.bis.doc.gov/index.php/policy-guidance/faqs). This is not the same as a conventional refinery, but a much cheaper and easier process used to stabilize the condensate. Condensate can then be mixed with natural gas to produce Liquefied Natural Gas (LNG). Condensate is also used to dilute heavier oils to make them light enough to go through pipe lines, and generally cannot be used as fuel for trucks or cars because the octane is not high enough.
The U.S. is literally floating in condensate, as a byproduct of shale operations in North Dakota and Texas. That’s why condensate is also referred to as ultra-light shale oil. With the U.S. shale gas boom and the energy needs of South Korea, which is the world’s second largest LNG importer, this simple clarification makes quite a pair for increased sales in the U.S. and cheaper imports of LNG from the U.S. as opposed to sources from the Middle East. This release from BIS over the holidays may increase export sales by as much as 1 million barrels a day by the end of this year, according to Citigroup analysts, thus benefiting consumers in South Korea and workers in the U.S. energy sector. What a wonderful gift!
President Manzullo served in the U.S. House of Representatives from 1993-2013 and chaired the Foreign Affairs Subcommittee on Asia and the Pacific. The views expressed here are the author’s alone.
Photo from Daniel Foster’s photosream on flickr Creative Commons.