In 1975, the United States Congress passed the Energy Policy and Conservation Act (EPCA) to minimize the impact of future oil embargos by oil producing nations. The law grants the President authority to establish rules prohibiting the export of crude oil and natural gas, but also gives the President authority to grant exemptions to the ban under certain circumstances. Subsequent legislation, including the Mineral Leasing Act, the Naval Petroleum Reserve Production Act, the Outer Continental Shelf Lands Act and the Export Administration Act of 1979 (among others), provided further restrictions and exemptions to the ban. All of this legislation was passed when the prevailing belief among lawmakers was that national security would be enhanced by limiting the foreign exports of crude oil and natural gas.
Since the ban was imposed, opponents of the law have tried, unsuccessfully, to have it lifted. Recently, efforts to repeal the ban have picked up steam as a result of increased domestic oil production, and political events overseas. Proponents pushing to lift the ban on crude oil exports argue that the recent jump in domestic oil production from new fracking technologies makes the ban obsolete and unnecessary from a national security perspective. An intense lobbying effort to lift the ban is currently underway despite the fact that the US continues to import approximately 7 million barrels of crude oil a day.
Independent Refiners Favor Keeping the Ban in Place
Those in favor of lifting the export ban believe that such a move will decrease the worldwide price of crude as a result of increased world supply. However, even the proponents admit that such a reduction in world prices will be contingent upon whether the Organization of the Petroleum Exporting Countries (OPEC) decides to maintain current production and not reduce oil production in order to uphold current pricing. Such an admission suggests that lifting the ban could once again cause this nation to have its economic and national security at risk as result of actions taken by the same countries that caused the US to enact the crude oil embargo in the first place.
Opponents of lifting the ban believe that allowing exports will only benefit oil producers and will result in an increase in domestic crude oil prices. In fact, some of the largest and most strident opponents of lifting the ban are independent refiners, big and small. Both Valero and Tesoro have publicly opposed lifting the ban, believing that domestic crude price increases will negatively impact refining margins for those independent refiners that purchase crude oil from oil producers.
Industry observers believe that the battle between producers and independent refiners is less about equalizing world crude oil prices then it is about which energy sector should benefit from exports. Although crude oil exports are banned, the same ban does not apply to the sale of refined products or natural gas liquids (NGLs). Observers argue that so long as the ban is in place, independent refiners benefit by being allowed to export refined and finished products at a premium. If the ban is lifted, a portion of the export premium now paid to independent refiners will instead go to oil producers. A reduction in the export of finished products, combined with a possible increase in the cost of crude oil, will further shrink refining margins, putting the long term survivability of many small refining companies at risk.
Over the past few years, a number of integrated oil companies with refining facilities in the Gulf Coast have started installing splitters in crude units, which is a quick and low cost means of separating heavier crude from condensate at the beginning of the refining process. Since the ban only pertains to crude oil, condensates, which can be sold as a light oil product (such as naphtha and kerosene) do not fall under the current ban. This ongoing capital investment by major integrated oil companies suggests that despite intense lobbying efforts, it is doubtful the ban will be lifted any time soon. If industry believed a lifting of the crude oil ban was eminent, refiners currently installing splitters would direct capital and resources elsewhere.
Some opponents of lifting the ban note that the US is still an importer of crude, up to 7,000,000 barrels per day, and that this imbalance needs to be equalized before any consideration is given to lifting the ban. Those opposed to building the Keystone pipeline have seized on the oil industry’s efforts to lift the ban to undercut industry’s arguments in favor of the pipeline. Pipeline proponents argue that exporting Canadian tar sands oil into the US will further reduce this country’s dependence on oil from countries less friendly to the US, yet some of these same proponents are also in favor of lifting the export ban. Activists, believing that the Keystone pipeline creates grave environmental risks, argue that the country’s thirst for crude should not be increased by exports, requiring additional imports from Canada, and using this increased demand for imports as justification for approving the Keystone pipeline.
Obama Administration -- No Convincing Argument to Lift Ban
Political commentators believe that barring any unforeseen crisis or circumstance, it is highly unlikely that the ban on crude exports will be lifted any time soon. In fact, the current Secretary for Energy in the Obama administration recently stated that those in favor of lifting the export ban have failed to put together a convincing argument. The nation is still a net importer of crude oil, and although crude production has spiked due to improved recovery from shale and enhanced fracking technology, those increases might be temporary because recent evidence suggests that shale production slows quite rapidly after the initial stages of oil recovery. As a result, some believe that lifting the ban now is premature especially when there is still uncertainty that current increased crude production is sustainable.
Although EPCA restricts the sale of natural gas, the exemptions to this ban are administered by the Department of Energy and are less restrictive than the rules governing the crude oil ban which are administered by the Department of Commerce. As a result of these less restrictive rules, the Obama administration and the natural gas producers have agreed to modify the ban in a piecemeal fashion. Instead of lifting the ban on natural gas exports in total, the Obama administration has approved, on an application basis, the construction of six separate terminal facilities allowing for the shipment of natural gas beyond the continental US, with additional applications pending. Some in favor of lifting the crude oil ban believe that a similar piecemeal approach might be successfully employed to slowly lift the crude oil export ban while monitoring the domestic impacts of such a move.
Lifting the Ban as Foreign Policy
Just as foreign crises were the genesis of the crude and natural gas export ban, recent struggles in the same vicinity of the world could be the impetus to liberalize US policy. Russia’s recent intervention into parts of the Ukraine has been met with calls for sanctions against Russia. However, since much of Europe and the Ukraine are dependent on Russian natural gas, there is concern that international efforts to sanction Russia for its aggressive actions will be ineffective due to Europe’s reliance on Russian natural gas. Proponents of lifting the ban on crude and natural gas exports have used the recent Russian intervention as an opportunity to push its agenda, arguing that exports of natural gas from the US to Europe and the Ukraine could strengthen the alliance of countries seeking to impose sanctions on Russia. Such an argument appears somewhat opportunistic since it will take years for the US to build the infrastructure necessary to replace a large percentage of the natural gas Europe receives from Russia. Even if natural gas imports to Europe are increased, this product will come at a higher cost since natural gas shipped from the US must be cooled and condensed to a liquid for shipment, which is more expensive than delivering the same material via pipeline, as Russia currently does.
Steven Farkas is of counsel in the Los Angeles office of Manatt, Phelps & Phillips, LLP. With nearly 25 years of experience working in-house for petroleum companies, he has handled the full array of issues that confront the heavily regulated industry. Mr. Farkas has advised on numerous asset sales and acquisitions, environmental compliance matters, investigations and enforcement actions. He can be reached at (310) 312-4137 or sfarkas@manatt.com.
This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. The first column in the fourth edition of this series discussed Environmental Risks in Buying Contaminated Properties.
