Oil Producers Hope DC Talks Ease Export Ban

Recent meetings between U.S. oil producers and Commerce Department officials have fueled industry hopes that the Obama administration may soon begin to ease a longstanding ban on oil exports.

Although it would require an act of Congress to end the four-decade export ban, some analysts and executives believe the White House may be getting ready to open up the taps a bit, allowing some export of a super-light form of oil known as condensate, which falls into a regulatory gray area.

Executives and sources said a number of major shale oil producers have quietly stepped up lobbying efforts over the contentious energy issue in recent weeks, meeting with officials from the Commerce Department's Bureau of Industry and Security (BIS), which oversees exports.

Analysts also pointed to comments by several senior administration officials this month about a possible overabundance of certain types of crude, particularly the variety produced in the Eagle Ford shale, which is rich in condensate. Some refiners have said an excess of lighter oil is already forcing them to slow operations, an early sign of a growing glut.

Starting with condensate rather than crude could allow President Barack Obama to test the waters by addressing a product for which there is limited domestic demand.

Pioneer Natural Resources (PXD), a leading shale oil producer, held its first meeting recently with Commerce officials. They were "interested in understanding more about our opportunities and growth projections", said Mark Berg, the company's executive vice president and general counsel.

"We are optimistic based on the communication we have had with the administration that positive steps will be taken on condensates and we are encouraged by that," he told Reuters.

A BIS spokesman did not reply to requests for comment on the nature or frequency of recent meetings.

Many analysts believe any action is likely to be low-key and incremental. The BIS could grant individual export permits quietly, for example, or approve limited swaps of crude for other varieties with other countries like Mexico. Some doubt there will be any action at all until after the mid-term elections.

Any easing of the ban could provoke a backlash. Some critics say booming U.S. shale oil production should remain at home to temper gasoline prices. Environmentalists seeking to stymie more oil drilling are also lining up to oppose overseas shipments.

But market pressures to export are building as the shale energy boom floods the country with excess light, sweet crude.

A number of other oil companies have also recently met with trade officials to talk about condensate exports, according to Robert Dillon, a spokesman for Alaska Senator Lisa Murkowski, a champion of U.S. crude exports.

Last month, Murkowski presented a paper that said existing rules could be easily amended to allow for condensate sales abroad. On Thursday she urged allowing for oil swaps.

"It won't solve the oversupply issue but it is a good first step," Dillon said.

OIL REDEFINED?

Pioneer, one of the leading producers in both the Eagle Ford and the Permian Basin in Texas, is among the companies that says it must sell oil at below-market rates because of the ban on exporting domestic crude.

Imposed after the Arab oil embargo of the 1970s, the measure bans exports of condensate that is produced from an oil field. But condensate from a natural gas processing plant can be exported because under the law it is considered a refined fuel.

Changing the way condensate is defined could be one way to open up the taps, although it may not be simple.

Excluding so-called "lease" condensate from the restrictions would "involve multiple code changes, including to tax codes and Iran sanctions legislation," Eurasia Group analyst Greg Priddy said in a research note last week.

At Columbia University this month, Obama adviser John Podesta said the administration was "taking an active look at what the production looks like, particularly in Eagle Ford, in Texas", and whether refiners can absorb that type of oil.

While condensates can be blended into the crude supply or used by Gulf Coast refiners, most of them are configured to run heavy oil and so have limited demand for it.

In late April, Valero Energy Corp, the largest U.S. independent refiner, said it had reduced operations at two refineries that were unable to process inland U.S. crude that was becoming increasingly "light".

Last week, Energy Secretary Ernest Moniz said in Seoul that the issue was "under consideration" but said primary responsibility rested with the commerce department.

Rusty Braziel, president of Texas-based RBN Energy, said he expects any development in the coming weeks will be "a small-step trial balloon" to test the political reception to the rule as well as the impact on prices.

In recent few months, Braziel said he has gotten several queries from a number of different administration officials and congressional staff asking for more clarity about condensates.

"Just the fact they are asking the question made me think there is more going on here than just a few people chattering," he said.

MAYBE LATER?

Some observers doubt there will be any movement on oil exports before mid-term elections in November.

Obama, seeking to avoid angering allies in the environmental movement, may try to defer any action until domestic oil prices drop so low that producers are forced to begin shutting in production, they say.

Others dismiss the latest rush of enthusiasm as misguided.

"We had heard a lot of rumors around that in the past four to six weeks. It has died down," says Warren Henry from Continental Resources (CLR), a leading producer of crude from North Dakota's Bakken region, which has little condensate.

"There were some people pushing for some incremental changes starting with just allowing condensates to be exported. We don't think it is the right solution."

Pioneer's Berg said that while he would welcome the incremental steps, he said the company is keeping its eye on the main prize: a comprehensive overhaul of the export ban.

But some believe political considerations may prompt Obama to move sooner. The theory is that allowing for a small opening might aid fundraising efforts for vulnerable Democrats like Mary Landrieu of Louisiana, a big oil state.

"Political factors may move to a decision where economic factors will not," said Al Troner of Houston-based Asia Pacific Energy Consulting.

Reporting by Valerie Volcovici