Washington's mounting debate about whether to lift the decades-old ban on crude-oil exports is threatening to create a rift between petroleum producers and refiners.
If Congress eliminates or significantly alters the ban, which has been in place since the mid-1970s, the financial windfalls that refineries are reaping right now from surging exports of gasoline, diesel, and other refined oil products would be put in jeopardy, and oil-producing companies would be poised to gain from exporting their crude product instead.
"The coming battle is going to be between refiners and the upstream producers," a refinery lobbyist said. "Within the independent refining sector there is beginning of a very robust debate among folks who are normally free-traders but who want to maintain the status quo, at least for the time being."
The lobbyist, who would speak only on the condition of anonymity, added: "We wouldn't be doing as well financially if it weren't for that [the ban]."
That's not lost on companies that produce but don't refine oil, such as Continental Resources, which has the biggest footprint in North Dakota's vast Bakken oil field. Along with Texas, North Dakota is largely responsible for America's oil boom of the last several years.
"Major oil companies are exporting refined products with no limitations, I might say, at record rates," said Harold Hamm, founder and CEO of Continental Resources, at a small dinner in Washington last fall with reporters and other domestic-energy executives. "Why shouldn't independent producers be allowed to do the same? I don't think any of the domestic producers will be their milk cows." That comment prompted muffled laughter from the dinner attendees, to which Hamm added with an equally muted chuckle: "Well, that's how we feel about it." The dinner was organized by the Domestic Energy Producers Alliance, which represents companies that primarily produce (but do not refine) oil and natural gas inside the U.S. only. Hamm chairs the group.
Since 2008, U.S. oil production has increased 56 percent, and crude-oil imports have correspondingly fallen to the lowest level since the mid-1990s. In response to this oil boom, refineries have been exporting record amounts gasoline, diesel, and other products refined from oil, which do not face the same federal trade restrictions as crude oil.
In October, companies exported about 3 million barrels of petroleum products per day, almost a 150 percent increase since 2008, according to the most recent data available from the Energy Information Administration. Refined petroleum products brought in a record-high $11.4 billion in October, according to Commerce Department data. In 2012, refined petroleum products were the single-largest exported product out of the United States, and 2013 is expected to show similar results.
"It's an archaic rule that should be done away with," Hamm said. "Ten years from now, I hope we're wrangling with Congress over it. We need exports."
Since Hamm made those comments, the debate has taken off in Washington faster than even many in the oil industry had expected. Last month, a senior official at Exxon Mobil, which like other major international oil companies both produces and refines oil, told The Wall Street Journal the ban should be revisited. Speaking at a Platts event last month after the Exxon Mobil official's comments, Energy Secretary Ernest Moniz signaled an openness to reconsider the ban.
The crude-oil ban dates back to the 1973 OPEC oil embargo, which sent domestic oil prices soaring and accentuated America's oil scarcity. In the wake of that energy crisis, Congress restricted exports of crude in most cases as a means to limit future oil-price shocks (though the success was limited). In the few cases exports are allowed—mostly to Canada—companies must obtain a specific license from the Commerce Department.
Two major speeches on Tuesday—one by Senate Energy and Natural Resources Committee ranking member Lisa Murkowski, R-Alaska, specifically on energy exports, and another by American Petroleum Institute CEO Jack Gerard—are both expected to touch on the crude-oil export ban.
The factions of the oil industry calling to lift the ban are getting louder. In addition to the vocal positions by Exxon Mobil and Continental Resources, API, the largest trade group representing all parts of the oil industry, held a conference call last month to express its support for lifting the ban and to reiterate that the debate should be "all about free trade."
When asked if API was getting pushback from refineries, Erik Milito, API's director of upstream and industry operations, responded simply: "We're not. We are an organization that is at its core a free-trade organization."
That's not to say there isn't or won't be any pushback across the oil industry. The debate is young. Many refineries are still determining their positions, and company spokespeople contacted for this story expressed at least cautious non-opposition to lifting the ban and at most outright opposition to it.
"Valero does not support lifting the ban on crude oil exports. We support the current system, where a potential exporter can apply for a license to send limited amounts of crude outside of the U.S.," Valero spokesman Bill Day said in an email last week. Noting that Valero has a license to export crude oil out of Texas to Canada, Day added: "In general as a refiner we believe that the U.S. has advantages keeping the bulk of the crude oil (and natural gas) here so it can be turned into value-added products for use domestically and overseas."
A spokesman for Marathon Petroleum Corporation, another major refiner, sounded a similar tone with respect to the trade benefits of exporting refined oil products, although the company doesn't oppose lifting the ban.
"We believe the economics of the global petroleum market make it more advantageous for many countries to import refined products from the U.S., rather than crude oil, because the U.S. refining industry's capacity and capabilities are second to none," spokesman Jamal Kheiry said in an email. "However, as to MPC's position, we don't oppose lifting the crude-oil export ban, as we fully support free markets."
The American Fuel and Petrochemical Manufacturers, a group that represents refiners including Valero and Marathon, does not oppose lifting the ban on crude-oil exports.
"We're free-marketers," said Charlie Drevna, president of AFPM. "We've historically been that. Right now, we've reaffirmed that. I'm sure we'll be addressing it again going forward."
When asked about his member companies not supporting lifting the ban, Drevna said: "There are some refineries who may not like it. There are some refineries who are neutral. There are some refineries who are supportive of it."
If Congress does lift the ban, Drevna said another law governing the shipment of goods in U.S. waters should be repealed too. The Jones Act, dating back more than 90 years, requires all goods—including energy products—that are shipped in U.S. waters from one part of the country to another be transported on a vessel built in the U.S. "The Jones Act is really outdated that hampers economic growth," Drevna said.
How wide this rift within the oil industry grows will depend on how much momentum the debate gains. Last year, the Obama administration approved a handful of applications to export natural gas to countries that are not free-trade partners with the U.S., but changing the status quo with the crude-oil export ban is a much bigger task, in part because the perception of higher gasoline prices makes politicians nervous, especially in an election year.
This article appears in the January 7, 2014 edition of NJ Daily.
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