Thoughts On Repeal Of US Ban On Crude Oil Exports -- December 18, 2015

Updates

December 19, 2015: from Yahoo!Finance --

Nothing will change any time soon now that Congress has repealed a 40-year ban on oil exports, allowing U.S. producers to sell crude overseas. But the surprising change in policy—once strongly opposed by President Obama and fellow Democrats—could become rather significant when (or if) oil prices rise again.

The near-zero impact on consumers is one big reason Obama signed the law, which energy companies such as Exxon Mobil and Continental Resources have sought for years. Gasoline prices are low, and the repeal of the export ban is unlikely to change that. More oil will be flowing into global markets when Iran, which has been subject to sanctions, begins exporting oil again as the sanctions lift. Those low prices for raw crude are the main thing keeping the price of gasoline and other finished energy products low.
If oil rises above $50, however, the picture could change. And the higher prices go, the stronger the incentive will be for U.S. producers to crank up drilling and send the crude overseas. “With higher prices, U.S. producers would produce more again,” says analyst Mark Broadbent of research firm Wook Mackenzie. “In a stronger price environment I’d expect to see more exports and producers eager to ramp up prices.”

That sounds like it might be bad news for consumers, and an oversimplified read of cause and effect in the energy markets might make it seem that way. In reality, however, energy prices in the United States will be set by the global price of oil, which is set by worldwide supply and demand. If U.S. producers export more, it will be unlikely to change gas prices by much, even if prices are high.

That might sound counterintuitive, since it seems like the best way to keep prices low at home is to keep as much of the raw material as possible inside U.S. borders. Here’s the catch: Most of the U.S. oil is of the “light, sweet” variety, whereas most U.S. refineries are configured for heavier crude that comes from places like Canada, Saudi Arabia and Venezuela. Prior to the shale-oil boom—a phenomenon of the last 10 years—heavier crude was the main product available, so the companies that turned it into gasoline made the long-term decision to gear their equipment toward the product they had.

A few refineries have reconfigured their equipment to handle the lighter crude pulled from U.S. ground, but that’s expensive and risky, given that oil prices are so volatile to start with. And the construction of new refineries is fraught with costly regulatory headaches. So the majority of refiners still need the type of oil that comes from outside U.S. borders. The irony is obvious: The bounty of crude produced by the shale revolution has limited use as a domestic product.

Everything I've read elsewhere (from credible sources) and from RBN Energy suggests the above is accurate. The comments again, are most entertaining, and reveals that a lot of folks are not paying attention. 

Original Post

 

From Rigzone with regard to the lifting of the ban on US crude oil exports -- again, remember, the bill has not been finalized, and it has not been put on the president's desk:

Not everyone is optimistic, however. At the University of Houston, energy fellow Ed Hirs, said the import-export math simply doesn’t work.

“If the U.S. is able to start exporting a million barrels of oil a day, that means we’re going to have to start importing another million barrels a day,” he told Rigzone. “The producers in the Bakken still don’t understand that they don’t sell their oil below what OPEC can sell it for, and they’ve been pushed out of the refineries in Philadelphia because they won’t compete on price.”

Of course that doesn't make sense at all, "If the U.S. is able to start exporting a million barrels of oil a day, that means we’re going to have to start importing another million barrels a day." Two reasons that is illogical: one, the US doesn't need more light oil; it needs heavy oil. Exporting light oil won't have any effect on importing heavy oil. Second, unfettered, the Bakken can easily ramp up to 1.5 million bopd, and if the price was right, the Bakken could ramp up to 2 million bopd -- and that's just the Bakken. Texas (Permian and Eagle Ford) could do even more. Hirs obviously has much more knowledge and experience with this, so I'm wrong, but I would like to know why I'm wrong.

The article continues:

Hirs isn’t the only one not quite ready to pop open the champagne.

Analysts at Raymond James (RayJa) said in a note to investors Decemeber 16, 2015, that assuming the framework remains intact, the obvious winners would be U.S. Lower 48 oil producers who would benefit from a narrower WTI discount to Brent and U.S. solar developers, who would avoid the looming tax credit fall-off at the end of 2016.

“On the other hand, domestic refiners – which have long lobbied against lifting the export ban – would find a narrower WTI-Brent spread unhelpful, though there is the possibility of a new refining subsidy being added to the package, thus cushioning the effect on margins. On a side note, we cannot help remarking on the peculiar timing of this (relatively sudden) deal in the making: Congress is doing this on the cusp of 2016, a year when U.S. net oil imports are set to expand for the first time in a decade,” RayJa wrote.

These are interesting tea leaves:

• Jack Kemp has noted that US oil imports have already begun to surge (without explanation);
• Hirs above suggests the US will require an increase in imports; and,
• RayJa says US net oil imports are set to expand for first time in a decade.

I don't think most Americans are aware of that. I have only recently become aware of that, and the explanations are not forthcoming.

The article continues:

What producers are counting on is the crude exports would provide some uplift to WTI oil prices relative to Brent.

“It allows us to pull that release valve to let that bathtub empty a little bit in the United States. That’ll help to lift the WTI price and all the crudes that are bench-marked off of that, and so that will help all parts equal in the U.S., but it’s not going to put us back into the same commercial health that we had back when we were at $80 a barrel,” Medlock said.

“If the ban is lifted tomorrow and you could actually move the crude to coast and get it away from Cushing, you would see that pressure in Cushing subside and the price of WTI should creep up toward the price of Brent. In WTI terms, that gives you a buck. It gives you back more in the lighter, sweeter crudes because those are discounted even more heavily. So you might see $2, $3 come back to the wellhead for those guys, and in a business where everyone is scraping for margin, that’s incredible. So it’s going to help the industry, but it’s not going to result in a revitalization of the industry.”

My thoughts if President Obama signs off on exporting US crude oil:

• short-term (one to five years) -- won't affect the actual price of oil much. However, it has a huge geopolitical effect.
• long-term (> five years): will dampen volatility and will continue to have a huge geopolitical effect. 

Failed: OPEC's mission is "to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry." It looks like that mission is becoming another US responsibility, by default.

These are the tectonic changes taking place and might take place with regard to the oil industry, not in any particular order:

• Iran is back in the game
• Libya changes its name to the ISIS Republic of North Africa (IRNA)
• Russia has a toehold in Syria and could become a major Mideast energy thorn in Saudi's backside
• Canada remains the canary in the coal mine, whether it can survive $40 oil much longer
• Based on comments by Trudeau in last 48 hours, Canada might get its act together with regard to pipelines to west coast
• Venezuela could get its act together; I wonder if Venezuela might not be #1 competitor (vs Canada) for US source for heavy oil; remember: biggest beneficiary of the killed Keystone XL was Venezuela
• Mexico looks like it is getting its act together
• for first time in a long time, oil is a true commodity; no more cartels; Saudi Arabia sets no quotas; completely market driven; US (if President Obama signs) will export oil which ends the other cartel
• oil no longer a geo-political weapon -- at least not globally; perhaps regionally (EU, Ukraine, Crimean)
• the big unknown: is the Mideast / Turkey becoming more stable or more unstable? We have some adult leadership in the Mideast now but not sure how long he plans to stay or what his real intentions are
• the other big unknown: exactly how much deferral/cancellation of big CAPEX projects from 2014 - 2017 are really going to affect global supply of oil; I used to think not at that much; looking at historical data, I'm not so sure; much of this depends on China's growth

Some say at current prices only 1/6th of the Bakken is economical. Let's go with that.

• OOIP: 500 billion bbls
• rate of recovery: 20%
• recovery: 100 billion bbls across the Bakken
• 1/6th of 100 billion bbls: 16 billion bbls
• North Dakota currently produces 1 million bopd x 365 days = 365 million bbls, rounding to 500 million bbls/year -- with 60 rigs and lots of real and artificial restrictions on production 
• 1/6th of the Bakken: basically, the quadrangle formed by Williston-Tioga-Parshall-Watford City (and SM Energy up in Divide County, as an outlier)

US crude oil imports from Venezuela: