Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) has always been opportunistic with its investments. Since the Gulf of Mexico oil spill, BP (NYSE:BP) has been forced into a more aggressive industry stance. Pair the two up and you get a refinery in Texas that will process oil just enough to skirt a U.S. ban on crude exports.
The case that proves the point
The United States ban on exporting oil dates back to a time when oil imports played an outsize role in the domestic energy picture. A resurgent U.S. drilling industry, however, has reversed the course of domestic production, which is now heading notably higher. That's led to calls for an ease on the export ban and a surge in exports of oil byproducts like propane, which aren't subject to the ban.
In fact, propane highlights the potential for exported oil. In just about two years, propane exports have increased from about 100,000 barrels a day to nearly 400,000. That's huge growth for a product that has historically been the unwanted stepchild of the energy industry. Most of the large U.S. propane players, like Suburban Propane (NYSE: SPH), are focused on serving the domestic market, so it's hard to find a direct play on this trend.
That said, about 20% of NGL Energy Partners' (NYSE:NGL) business, a relatively small player in the propane arena, is tied to propane logistics. That includes propane terminals and storage facilities, the very things that are needed to facilitate exports. Interestingly, another 20% or so of NGL's business is in crude oil logistics, which circles the discussion back around to oil.
Getting around the ban
Propane is a byproduct of processing oil and natural gas. Because it's processed, it isn't subject to an export ban. Crude oil, as its name implies, isn't processed at all. Other refined products, like gasoline, also largely avoid the ban. But what if a company, say BP, were to refine crude just enough to say it wasn't crude? Then it, too, could skirt the ban.
That's exactly what's happening, and Kinder Morgan Energy Partners is helping build the relatively low-cost facility that will do the refining. Kinder Morgan Energy Partners CEO Richard Kinder noted in the partnership's fourth quarter conference call that, "the export of refined products is increasingly in vogue." Moreover, "We're handling a fair percentage now... and we will continue to expand that by more connectivity, by more berths that we are building and by more storage capabilities."
Kinder went on to highlight the BP deal, which cost just $360 million. But, here's the rub: He called the output of that plant "split product," specifically saying, "It's not refined products, but it will facilitate [the ability to] move the split product out." In other words, the oil is refined just enough to export.
That makes BP and Kinder Morgan Energy Partners among the first to test just how rigid the U.S. government wants to be. If the plant ruffles enough Washington D.C. feathers, they could find new regulations to shut the plant down. That, however, could take some time and, based on the increasing supply of oil, may never happen.
That's why other companies, including Valero (NYSE:VLO) and Phillips 66 (NYSE:PSX) are also looking to build such refineries. As the growth of propane exports shows, that could be a real boon for both companies. In fact, BP has taken all of the Kinder Morgan Energy Partners facility's capacity for 10 years. That's the kind of deal that Valero and Phillips would love to add to their respective portfolios.
Being shut down, however, isn't the only risk. What if the government simply kills the oil export ban? That would make such plants unnecessary. In that case, relatively low building costs and long-term contracts would likely keep the plants viable. Assuming the U.S. government doesn't step in to stop the workaround, this could be a big opportunity for Kinder Morgan and copycats like Valero and Phillips 66. And if the oil ban goes away, facilities with long-term contracts would still be winners. Keep an eye on this project, it could materially alter the global oil landscape.