Debating the Export Ban

Lifting the export ban on U.S.-produced crude could be a major benefit to the U.S., or a huge mistake, depending on who you ask.Consensus favors lifting the ban but there's little talk or congressional action yet.
By Luke Geiver | December 15, 2014

Lifting the export ban on U.S.-produced crude could be a major benefit to the U.S., or a huge mistake, depending on who you ask. Those in favor of eliminating the ban believe the option to access new markets and foreign refiners will deliver an unprecedented level of certainty to shale oil producers concerned with the likelihood that U.S. light sweet crude refiners will soon be at capacity. Proponents of lifting the ban believe that without its removal, oil produced in the U.S. will have limited refining endpoints, and investments in field-level expansion could stall. Opponents of lifting the ban believe the policy enacted during the ‘70s Arab oil embargo, still has merit. If the ban is lifted, opponents believe, U.S. consumers will pay more for refined products such as gasoline and diesel. And, U.S.-based refiners—who benefit from domestically produced crude that trades at a discount to the global benchmark—may be forced to slow production to cope with higher crude-acquisition costs.

In September, the U.S. Government Accountability Office released a 45-page report aimed at providing insight into the crude export ban debate following numerous studies published or paid for by both non-partisan groups and industry-specific entities, congressional hearings featuring expert testimony and requests from policymakers looking for guidance. Although the report’s conclusion that lifting the export ban would be a boon to the U.S. was clear, debate on its merit still exists and little talk or congressional action has been taken.

Concerned Parties
Dan Eberhart has never been afraid to take action on his beliefs. In the mid-2000s, Eberhart was the vice president of a Houston-based oilfield services firm looking to expand into one of two places: North Dakota or Pennsylvania. “We had performed a high degree of focus work on where to expand. My boss chose Pennsylvania and I thought it was the wrong move,” he says. “I felt so strongly about it that I quit the company to focus on North Dakota. At the time, people were really focused on natural gas, but I thought the dynamics of shale oil were amazing.”

In 2008, Eberhart moved to North Dakota with what he calls, “a focus on the story of the Bakken.” For Eberhart, stories of difficult living conditions and high rental fees were true. His dreams of owning a home in Watford City were quickly dismissed, he says, and after living out of a hotel room he moved into a high-cost apartment with roommates. That same year, Eberhart started Frontier Energy Group LLC, and he and his team acted on their desire for acquisitions and purchased a well head service firm based in Watford City. Frontier Energy Group went on to acquire two other Bakken-related firms over the next three years. In 2013, the company made its largest acquisition to date, purchasing Canary Wellhead. Following that acquisition, Eberhart and team rebranded under the name Canary LLC. Since Eberhart’s move into the Bakken, the company has performed nine total acquisitions and now has service locations in 55 different places throughout the U.S.

Eberhart started with 12 employees, and now oversees more than 400. Because his team has been outbid on its previous three attempts for Bakken-based acquisitions, the team has shifted its Bakken-specific focus. “We have switched our Bakken model to investing in and buying more equipment to grow our existing businesses there,” he says. Since acquiring the Watford City well head location in 2008, Canary has invested an additional $500,000 for facility upgrades and millions more to purchase frack heating equipment for its Williston location last winter. “We are very bullish on the Williston Basin and the Bakken play,” he says.

Eberhart is quick to point out his history and bias for the Bakken when talking about his professional career’s fast ascent the past six years. Because of his commitment to the Bakken, he says, Canary LLC is now the largest independently held wellhead company in the U.S.

A visit to Canary’s website doesn’t offer any upfront proof, however. Instead, the main brand message in large text on the website is linked to an issue Eberhart and the team are now pushing. Eberhart has become a major voice in the crude oil export ban debate. The website features several posts, original stories and lists regarding the issue. If a visitor to the site were unsure of Canary’s true prominence in the unconventional shale industry—Inc. Magazine named the company one of the fastest growth firms in 2014—the messages on exports would indicate that Canary is actually a lobbying firm with a clear agenda supporting the removal of the ban. “We can export straw, chairs, wood and watermelons. Why can’t we export oil?” Eberhart says.

The reason for Canary’s focus on the crude oil export ban, according to Eberhart, is this: policymakers need to understand that failure to lift the ban creates a negative trickledown effect to firms like Canary. “If our story is to continue, the industry has to grow. If we are able to get to 600 to 700 jobs, the industry needs to keep pace,” he says. “If oil companies stall, we stall.”

Fueled by his quest to grow Canary’s presence in the Bakken and other shale plays within the U.S., Eberhart has become a crude export ban lift supporter and activist. He has traveled to Washington, D.C., met with many members of Congress in official and unofficial meetings and tweaked his website to reflect his views on the issue. Canary has also displayed banners in major metropolitan areas promoting the removal of the ban.

But, although he believes his work to explain the issue to anyone willing to listen gives those in favor of lifting the ban a more well-rounded foundation for argument, he also realizes the CEO of one independent wellhead service provider is only so big. “This has to be a collaborative effort amongst many parties,” he says.

George Baker, an energy expert for the past 30 years, agrees. In October, Baker was tasked to lead a new group called PACE, Producers for American Crude Oil Exports.

“We are domestic producers and independent producers who are in favor of American crude oil exports,” Baker says. “We would like Congress to eliminate a relic of the ‘70s and allow the export of oil so that we can really rationalize the markets as opposed to having a segregated market from the rest of the world.”

Baker and Eberhart believe they represent an answer to one of the main problems with lifting the export ban. “It is a new topic for a lot of people, including policymakers. Most people aren’t even aware of the new abundance of U.S.-produced oil we have,” Baker says. “You can’t blame America for not yet understanding this new age of abundance. For 30 years, it has been drilled into our collective consciousness that we are a country that is on the downslope of energy production and that we have to import a lot of our oil.”

Baker says, the PACE team will be working to educate the general public and members of Congress on what they believe to be the facts of the issue. “We will be telling people what the reality is and members of Congress need to be on the information curve.”

Baker will be pointing out several benefits of removing the ban. “We want to be able to send a signal to our domestic producers that they can produce as much as they can sell. We want to say to them that they can find buyers wherever they can,” he says. The group will also work to highlight the jobs—not just in the oilpatch—that could be linked to lifting the ban. Earlier this year, HIS Inc. released a crude oil export ban study that indicated up to 1 million jobs would be created post-ban.

But, while Baker and Eberhart work to eliminate the export ban, others are doing the opposite. Some refiners who have revised their U.S. operations due to their ability to utilize cheaper U.S. domestic crude, have formed their own group. The Consumers and Refiners United for Domestic Energy are opposed to lifting the export ban.

The same month the Government Accountability Office issued its findings on lifting the crude oil export ban, a CRUDE-commissioned study was released by Baker & O’Brien, an energy consulting firm. The study, “An Analysis of U.S. Light Tight Oil Absorption Capacity,” found that the U.S. refining system will have the capacity to process all of the light tight oil (LTO) produced in plays such as the Bakken or Eagle Ford for the remainder of the decade if LTO production continues to fall in the trajectory path estimated by the U.S. Energy Information Administration in its 2014 Energy Outlook. The study also found that the U.S. refining industry will have the capacity to absorb an additional 3.1million to 4.3 million barrels per day of LTO by 2020.

U.S. refiners will absorb that capacity in three ways: displacement of crude oil imports, increased utilization of existing refinery capacity, and capital expansions, the report says. The study also points out that these options will be possible under certain circumstances. Political, strategic and other factors will not limit displacement of crude oil imports with additional light oil, transportation of light oil to U.S. refineries will not be constrained, and additional heavy crude oil supply is limited to that expected to be produced In Canada. The report also notes that assumptions made regarding refining capacity for light oil were based on technical feasibility. “No attempt has been made to assess refinery economics, which are dependent on numerous factors that are specific to each refinery,” the study says.

Baker & O’Brien reported that roughly 1.8 million to 2.3 million barrels per day of additional light oil can be absorbed by displacing all LTO imports along with a portion of medium and heavy crude imports. Because LTO imports are close in grade to U.S.-produced LTO, displacing imports would be relatively straightforward. Medium crude oil imports would be more difficult to replace due to the naptha and light material content. Medium crude imports could be replaced by refiners that have excess naptha and lighter handling capacity; investment in additional light oil refining capacity in place of medium crude refining capacity investments, and mixing heavy oil with light oil. An oil blend of 41 percent LTO with 59 percent heavy oil contains the same naptha and lighter material values as imported medium crude. Displacing heavy crude would prove to be the most challenging, according to the study.

In the future, refiners can also utilize excess refining capacity not used due to previously formed contracts for medium and heavy crude. And, according to the report, roughly 1.1 million barrels per day of crude oil and condensate projects have been announced.

“It is likely that U.S. refiners will implement additional projects to process LTO, beyond those announced at this time,” the study says. “Not all companies announce their intentions to increase capability to process LTO, particularly when relatively modest investment is required.” With that relatively moderate investment, the report says, refiners could add 10 to 20 percent more naptha and lighter material capacity, a move that would help them process more LTO. Assuming costs are spread over five years, refiners would add roughly 108,000 to 503,000 barrels per day at a cost of $50 million to $240 million. CRUDE consists of four refiners, Philadelphia Energy Solutions, Alon USA Energy Inc., PBF Energy Inc. and Monroe Energy.

Potential Conclusion
Bakken production projections show that the record-breaking pace will continue. And, as of December, all signs show that lower-than-expected crude oil prices will not slow production. Eberhart and his team have performed their own internal research and believe that the U.S. is at or quickly nearing refining capacity for light sweet crude in the U.S. Other organizations, including the EIA, have reached the same conclusion. Exploration and production firms may not be willing to wait until 100 percent capacity is reached before they decide to cut capital spending plans. “Having worked with oil companies for several years, we know this. Oil companies are working on budgets 12 to 18 months in advance so I think they start easing on budgets when we hit 90 percent,” Eberhart says.

Based on the conclusions of multiple reports, U.S. producers may not have to worry about 90 percent or even about the export ban at all. Earlier this year, in support of lifting the crude export ban, Larry Summers, president emeritus of Harvard University and former U.S. Treasury Secretary, said, “The merits [in support of lifting the crude export ban] are as clear as the merits,  with respect to any significant public policy issue as I have ever encountered.”

The Brookings Institute says allowing goods to flow into the international marketplace gives buyers access to competitive prices and sellers access to world markets. That philosophy is what could provide policymakers with the information needed to pull the plug on the ban.

The GAO report said the studies it reviewed, and most of the stakeholders interviewed for the report, suggested that consumer fuel prices, such as gasoline, diesel, and jet fuel, could decrease as a result of removing crude oil. And, the GAO also reported that lifting the export ban could increase the price of domestic crude sold on the world market. “By removing the export restrictions, these domestic crude oils could be sold at prices closer to international prices, reducing the price differential and aligning the price of domestic crude oil with international benchmarks.”

Citing the findings of several reports, the GAO report also noted that lifting the ban would not only allow domestically-produced crude to trade on par with global benchmark prices, it would also spur on an increase in production. Growth in exploration and production could, however, trigger a decrease in domestic refinery growth and investments into additional capacity due to a higher price of domestic crude currently being used at U.S.-refineries.

What we are really seeing with all of the studies and the general path of the crude oil export debate, Baker says of his work explaining the benefits of lifting the ban, “is an intellectual consensus by professional economists who don’t have a financial dog in the fight coming to the very same conclusion that America’s consumer stand to benefit.”

Author: Luke Geiver
Editor, The Bakken magazine