(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, June 26 (Reuters) - The U.S. Commerce Department's
decision to allow two companies to begin exporting ultra-light
condensate after only minimal refining marks the beginning of
the end of the ban on American crude oil exports.
The ban, which applies to crude but not refined products,
has never made much sense economically or in terms of fuel
chemistry, but now the department's rulings show it may be
impossible to enforce in practice.
The Commerce Department and the White House insist there has
been "no change in policy on crude oil exports".
But these administrative decisions show how hard it will be
to prevent enterprising crude and condensate producers from
circumventing the ban by processing raw oil just enough to
ensure it no longer counts as crude.
WHAT EXACTLY IS CRUDE OIL?
The statutory authority for the ban stems from the 1975
Energy Policy and Conservation Act and the 1979 Export
Administration Act. But enforcement is left to the Export
Administration Regulations, the relevant section of which is set
out in Chapter 15, Part 754 of the Code of Federal Regulations.
To export crude a shipper must first obtain a license from
the Bureau of Industry and Security (BIS), which also enforces
restrictions on a range of other products, including items with
dual military and civilian uses, nuclear technology, law
enforcement products and execution equipment.
Crude turns out to be surprisingly hard to categorise. There
is no chemical way to define it. Raw oil is a mixture of
thousands of different molecules, mostly made up of carbon and
hydrogen in widely varying proportions, but with small amounts
of oxygen, nitrogen, sulphur, nickel and vanadium mixed in too.
Raw oil is heterogeneous. Crudes range from dark black to
brown or greenish in colour, from ultra-heavy oils denser than
water to ultra-light ones virtually indistinguishable from the
gasoline used in motor vehicles (or at least the ones in use in
the mid-20th century before motor fuels became more advanced).
To enforce the ban, BIS needs a legal definition of what is
crude oil and what is not. The bureau could adopt a stance
similar to Justice Potter Stewart's approach to pornography ("I
know it when I see it") but that might be held unlawful by the
courts if deemed "arbitrary and capricious", in the words of the
Administrative Procedure Act.
So BIS employs a two-part test: "Crude oil is defined as a
mixture of hydrocarbons that existed in liquid phase in
underground reservoirs and remains liquid at atmospheric
pressure after passing through surface separating facilities and
which has not been processed through a crude oil distillation
tower" (15 CFR 754.2(a)).
The liquid part of the test is designed to distinguish oil
from gas, while the distillation part is intended to
differentiate crude from refined products. It is the
distillation which lies at the heart of the current controversy.
WHAT COUNTS AS DISTILLATION?
Distillation separates the hydrocarbons in crude based on
their different boiling and condensation points.
In principle, crude can be separated into dozens or even
hundreds of fractions based on their slightly different boiling
points. Even then, separation may not be perfect because the
boiling points of many molecules are close together and the
process is fairly rough when used on an industrial scale.
Most refineries separate crude into about six broad "cuts",
each of which contains a range of molecules, and the streams are
then sent for further processing. Cuts range from refinery gases
and light naphtha, which come off at the top of the distillation
tower, to kerosene, heavy gas oil and residuum lower down.
The number of cuts is a matter of practical convenience and
commercial practice. It is possible to distil crude into more or
Distillation processes are not confined to oil refineries.
Some distillation units are much more complex than others. For
example, oilfields have simple units known as stabilisers which,
to meet safety specifications, distil raw crude just enough to
remove the most volatile components such as propane and butane
before it is put into pipelines or loaded onto tank cars.
The BIS regulations state hydrocarbons are no longer to be
considered crude oil once they have been processed through a
"crude oil distillation tower". But they are silent on how
complete that distillation must be. Nowhere do they say into how
many cuts the oil must be separated.
PRIVATE LETTER RULINGS
According to the Wall Street Journal, Enterprise Products
Partners and Pioneer Natural Resources
approached the Bureau of Industry and Security to ask whether
lightly processed condensates from the Eagle Ford shale would
count as crude under the Export Administration Regulations
("Rulings on oil exports roil industry", June 25).
From the moment BIS said lightly processed condensates would
not be defined as crude oil, they could be exported just as
easily as gasoline, diesel or jet fuel.
Crucially, there is no change in the law or policy, just an
interpretation of how existing laws and policies apply to a
specific set of circumstances.
There are established procedures under which corporations
and individuals can write to various government agencies and ask
them for a ruling on how the law applies to a certain situation.
Formally, these "private letter rulings" are advisory
opinions and apply only to the specific facts in the case
concerned. However, PLRs are valuable because they provide the
requesters with assurance that they will not subsequently face
criminal or civil prosecution by the government as long as they
have outlined their circumstances accurately.
BIS and the Internal Revenue Service issue many private
letter rulings on issues linked to export controls and taxation.
Some PLRs are published, with identifying details redacted. PLRs
interpret rather than make law but the process can set or modify
The gap between PLRs and policymaking is blurred. For
example, PLRs from the IRS explain how U.S. mutual funds were
able to pour more than $50 billion into commodity derivatives,
even though before 2006 it was generally thought the law
prohibited them from generating more than 10 percent of their
income from commodities and other alternative investments ("U.S.
tax ruling threatens commodity mutual funds", Sept. 14, 2012).
OPENING THE FLOODGATES
Precisely what BIS told Enterprise and Pioneer remains
unclear because the PLRs in this case have not yet been
published, though they might be at a later date.
Crucially, we still do not know exactly how much
distillation Enterprise and Pioneer told BIS they would be
carrying out before exporting the condensate.
The amount of distillation is variously described in the
Wall Street Journal as "minimal processing", "minimally
processed oil" and "stabilised and distilled" ("U.S. ruling
loosens four-decade ban on oil exports", June 27).
"Stabilisation (is) a process that heats up oil to boil off
some of the most volatile gases," the Journal says.
"Distillation is an increased step ... but far short of refining
or turning condensate into finished fuels."
The crucial point is that condensate does not have to be
fully refined or distilled before it can be exported.
Once that principle is established, it is not easy to see
where BIS can draw a new line. The PLRs obtained by Enterprise
and Pioneer apparently relate to condensates from Eagle Ford.
But the approach could just as easily be used for medium or
heavy crude oils that are stabilised and minimally distilled to
make them export-ready. Wherever BIS tries to draw a new line,
it must be able to satisfy the courts that it has some rational
basis and is not arbitrary and capricious.
AWKWARD POLITICAL QUESTIONS
News of the private letter rulings appears to have caught
the White House and the rest of the administration off-guard,
which is not surprising because government agencies issue many
such determinations each month.
It has also upset the careful political choreography in
which the White House, the Department of Energy, the Department
of Commerce and Congress have been intensively "studying" the
impact of easing or lifting the export ban.
Washington had been edging towards lifting the ban, but very
slowly, and now the PLRs threaten to accelerate the
administrative process before the political groundwork has been
"We are closely studying the economic, environmental and
security opportunities and challenges posed by growing (oil)
production and we'll evaluate policy options as needed going
forward," the White House told the Wall Street Journal.
Until the contents of the PLRs are known, the practical
significance of the determinations is impossible to assess, but
the political symbolism is enormous. Supporters of lifting the
ban have greeted the news with delight, while opponents reacted
But the PLRs reveal a more fundamental problem. It is almost
impossible to make a rational distinction between crude,
condensate and refined products based on their chemical
composition or use. The only practical distinction is based on
processing (the distillation test). But that leads the
government into the question of how much processing is enough.
Some U.S. oil refiners will complain bitterly about any move
to lift the crude export ban since its main effect is to boost
their profitability at the expense of domestic oil producers.
There are already complaints that oil producers are trying to
arbitrage around the regulations.
However, refiners already conduct their own form of
arbitrage, buying domestic crude, which is artificially cheap
because of the export ban, and then turning it into gasoline and
diesel that can be exported.
How much processing the refiners carry out before exporting
the oil is largely a matter of choice. The rules are clear.
Refiners do not have to completely refine the crude before
sending it overseas. "Topped crude oil, residual oil and other
finished and unfinished products" are not considered crude,
according to the Export Administration Regulations.
In an ideal world, the administration would recognise that
trying to distinguish between crude oil and refined products is
futile and lift the ban, explaining that it was introduced in
response to 1970s oil shortages and is no longer necessary.
In practice, it may be politically expedient for the White
House to create a new definition based on a minimally acceptable
amount of distillation. Doing so would help contain the
controversy and buy more time for refiners and voters to become
accustomed to the idea of oil exports.
(Editing by Dale Hudson)