With a few limited exceptions, U.S. exports of crude oil have been banned since 1975 under a law Congress passed to protect the nation's energy security in the aftermath of the 1973 OPEC oil embargo.
But as America's energy picture has improved dramatically over the past few years, many companies are eager to export the growing volumes of domestic crude oil being pumped from shale plays like the Eagle Ford in Texas and the Bakken in North Dakota to foreign markets.
Though the export ban remains in place for now, a number of astute, forward-looking companies have found a way to skirt the restrictions. Let's take a closer look.
A way around the export ban
The main issue with surging U.S. crude oil production is that it overwhelmingly consists of light, sweet crude oil and condensate, an ultra-light oil that falls under the definition of crude oil and, therefore, can't be shipped abroad. Many U.S. refiners are ill suited to process these light crudes and condensates, as they were modified to handle heavier grades of crude over the past decade.
But companies have found a way around these issues, by refining condensates just enough to create readily exportable products like gasoline, diesel, and naptha. This process, carried out through refineries called condensate splitters, not only helps companies skirt the export ban, but it also allows them to capitalize on the relatively low price for condensates.
Why condensate splitters are in high demand
Because of the rapid growth in condensate production and the mismatch with domestic refining capacity, condensates are significantly cheaper than domestic and international crudes. According to estimates by RBN Energy, an energy research and advisory firm, condensates trade at a discount of roughly $20 per barrel to benchmark Louisiana Light Sweet crude.
Condensate splitters are also much cheaper to build than typical refineries, costing only a few hundred million dollars, compared with billions of dollars for typical refineries. According to some estimates, roughly 445,000 barrels per day of condensate processing capacity from condensate splitters is planned or under construction along the U.S. Gulf Coast, the nation's main refining hub.
Companies splitting away
So far, one condensate splitter – located in Port Arthur, Texas, and operated by French oil giant Total (NYSE:TOT) – is already up and running, while at least another eight splitters are planned by companies including Kinder Morgan Energy Partners (UNKNOWN:KMP.DL), Targa Resources Partners, and Magellan Midstream Partners (NYSE:MMP), among others.
Kinder Morgan is currently building a splitter near the Houston Ship Channel that will be able to process some 100,000 barrels per day of condensates under a long-term, fee-based supply contract with BP (NYSE:BP).
Similarly, Magellan plans to construct a 50,000-barrel-per-day condensate splitter near its terminal in Corpus Christi, Texas, under a fee-based, take-or-pay agreement with Trafigura, a leading commodities trading house.
Targa, meanwhile, plans to build a 35,000-barrel-per-day condensate splitter at its Channelview Terminal on the Houston Ship Channel under a long-term, fee-based contract with Houston-based independent energy producer Noble Energy (NYSE:NBL).
One major risk to consider
While condensate splitters are a smart way to skirt current export restrictions, they only make sense assuming the current ban is kept intact. However, that is now looking like a tenuous assumption, given recent comments by White House officials suggesting that the Obama administration is seriously considering lifting or revising the ban.
If the ban were ended, condensate splitters would likely become redundant, since companies could simply export condensates to more advanced refineries in Asia or the Middle East that would be willing to pay a premium for their product. However, since Kinder Morgan, Targa, and Magellan have all secured firm, long-term contracts with their respective customers, their investments should be safe.