U.S. OKs Export of Processed Condensate, Not Oil. Why the Distinction Matters

Decision by the Commerce Department to allow two companies to export an ultra-light hydrocarbon confims existing policy. Or does it?

The Wall Street Journal, which broke the news about the Commerce Department ruling, put the headline "U.S. Set to Export First Oil Since '70s on its front page on Wednesday. The Obama administration said the oil export ban had not been lifted—not even loosened a little bit.

Forget that headline you saw yesterday, and the frenzy that followed it, about how U.S. companies are about to export domestic crude oil for the first time since the 1970s. That's not happening—at least not yet.

"It was a total exaggeration," said Fadel Gheit, senior oil analyst at Oppenheimer and Co. "People jumped to the conclusion that this is going to be the first step in the long-awaited lifting of the [oil] export ban."

What's at the heart of Wednesday's export news is actually something called field condensate—an extremely light and volatile hydrocarbon that is sometimes more like gasoline than crude oil, chemically speaking. It's also highly variable, so much so that its color can range from black all the way to the shade of cream soda.  

Refiners blend it into heavy crude or gasoline, oil companies use it to dilute bitumen from Canada's tar sands, and other companies use it in petrochemical plants. In its lightest form, refiners won't even classify it as crude oil, but the U.S. government doesn't differentiate—all condensate is crude oil as far it's concerned.

Whatever you call it, it's been piling up.

As oil companies tease oil out of shale and other tight rock formations, much of what comes up becomes condensate at surface temperatures.  In Texas' booming Eagle Ford Shale region, for example, "about half of what is reported as crude oil is actually condensate," RBN Energy LLC, a consulting firm, said in a report.

"There's no question that in the shale oil boom, great portions of it are coming up with stuff that is not really crude," said Tom Kloza, chief oil analyst at the Oil Price Information Service and Gasbuddy.com. "It's too light. It's condensate."

The flood of condensate has led to sharply lower sale prices for the liquid. That, in turn, led two Texas companies to seek confirmation from the U.S. Commerce Department that they could export processed condensate overseas, where it would fetch a much higher price.

The companies argued that because their condensate was being modified through a distillation process, it qualified as an oil "product"—and oil products (including gasoline and diesel) are not subject to the export ban that applies to unprocessed domestic oil.

The Obama Administration agreed.

Word got out that the two companies, Pioneer Natural Resources Co. and Enterprise Products Partners LP, got the greenlight to export condensate.

What that means is still not entirely clear.

The Wall Street Journal, which broke the news about the Commerce Department ruling, put this headline on its front page: "U.S. Set to Export First Oil Since '70s."

Other news reports followed saying that it is the first step in lifting the ban, a move that's become a top priority for the oil industry.

Lifting the oil export ban would be a big deal. U.S. law has prohibited the export of all but a trickle of domestic oil for the last four decades. For most of that time, the export ban was irrelevant because oil imports were soaring to meet rising U.S. fuel demand—and both seemed destined for permanent ascent.

But the need for oil imports has been falling amid decreasing U.S. fuel consumption and surging domestic oil production. Even though the country still imports about half of the oil it consumes, U.S. crude producers have been pressing for the freedom to tap into the more lucrative international oil market.

MORE: 2014: Export of American Oil Is Contentious Industry Goal After 4-Decade Federal Ban

On Wednesday, the reaction on Wall Street to the headlines was swift. Traders bid up the price of U.S. benchmark crude and the stock prices of U.S. oil producers. Refinery companies, assumed to be losing access to cheap landlocked domestic crude, saw their stock prices plummet. The market value of Valero Energy Corp., the nation's largest independent refiner, fell by about $3 billion for the day. 

The Obama administration, meanwhile, spent the day denying that the ruling changes anything, and that the oil export ban had not been lifted—not even loosened a little bit.

"There has been no change in policy on crude oil exports," Department of Commerce Spokesman Jim Hock said in a statement. "Crude oil that has been processed through a distillation tower which results in the crude becoming a petroleum product is no longer defined as crude oil. Petroleum product can be exported without a license, except in very limited circumstances."

Kloza and others agreed with the government's explanation.

"There's always been the law with Commerce that if you take something from the fields and you modify it or you process it, then it can be exported," Kloza said. "It's more of a confirmation of what we thought were the rules."

Others, however, still see a potentially important shift.

"Pioneer's success in arguing that a lightly processed condensate is a refined product shows the administration is being thoughtful about the crude export issue," Morgan Stanley analyst Adam Longson wrote in a research note on Wednesday. "Given this approval, we would expect other producers to be more aggressive/creative with export applications as well."

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