Testing U.S. crude oil export ban with swaps no simple matter

Thu Jun 26, 2014 1:25am EDT
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By Valerie Volcovici

WASHINGTON (Reuters) - Oil producers considering swapping U.S. light crude abroad for the heavier imported oil needed by refiners to work around a decades-old ban on exporting domestic crude may find the strategy harder to execute than it looks on paper.

As U.S. production of light crude oil continues to boom, some companies and lawmakers are calling for the United States to reform its decades-old ban on most U.S. crude oil exports - a policy that followed the Arab oil embargo of the 1970s.

A breakthrough arguably came this week, when U.S. officials clarified that a type of ultra-light crude known as condensate could be exported after enough processing to qualify as a refined product, exports of which are allowed. Swaps would be another way to test the ban's limits.

In theory it should take just weeks for Washington to allow oil producers to execute a deal, since these swaps are allowed by law. But analysts say meeting the base requirement - that the imports be of the same quantity and quality as the exports - is easier said than done.

The current law does not clearly define quality - for example, whether a heavier crude such as the kind Mexico produces is of higher quality because it is compatible with U.S. refining capacity, or lower quality because of its density.

"Ensuring that crude swapped in is of the same quantity and quality as crude swapped out, which is a loose paraphrase of one of the regulation’s many stipulations, may be non-trivial," said Kevin Book, policy analyst at ClearView Energy Partners.

The Commerce Department's Bureau of Industry and Security, which oversees exports, has received at least one application for a permit to export crude through a swap deal, Reuters has reported.

Earlier this month, Continental Resources confirmed it has applied for a license for a swap "to further demonstrate the need for a free market for crude." The largest leaseholder in the booming North Dakota Bakken region did not disclose with which country it intends to swap.   Continued...

An oil and gas drilling platform stands offshore as waves churned from Tropical Storm Karen come ashore in Dauphin Island, Alabama, October 5, 2013.. REUTERS/Steve Nesius