As you may know by now, exciting things are happening in the U.S. regarding the exploration and production of oil and gas. Thanks to the shale oil boom, the country is enjoying record performance. However, there is other news that you should also pay attention to as well. The U.S. will be able to export crude oil again sooner rather than later, and that means more business straight away for companies like Continental Resources (NYSE:CLR) and Pioneer Natural Resources (NYSE:PXD).
A little bit of history
Exporting domestically produced crude oil without a license has been illegal in the U.S. since the 1970s. Things are starting to change, however. Now, the idea of exporting U.S. crude oil has become attractive to the energy companies. Why? The reason is pure and simple economics. The current restrictions that are in place are beginning to undermine the industry's efficiency. Much of the country's present production of light crude oil comes from areas where refiners are not interested in working with it or even able to process it.
With only a handful of available buyers at home, producers have to choose between leaving the light crude oil in the ground or pumping it at depressed prices. Even though new refineries and pipelines are currently under construction, these improvements will take some time to complete. Allowing crude oil exports would certainly be a faster solution to this situation.
Time to export crude oil
Last month, the government allowed exports of minimally refined American oil for the very first time in 40 years. Two different rulings gave permission to two companies to ship ultra-light oil to foreign countries, setting a precedent for future permissions. There is pressure for this coming from many different corners.
On one side, you have the E&P industry actively demanding that President Obama lift the ban or at least establish exceptions under a "consistency with the national interest" clause. On the other, there's the European Union. The refineries in the E.U. look like a suitable choice for the light oil produced in the Bakken and Eagle Ford shale oil fields, while American refineries are actually built to handle lower-quality crude oil.
Additionally, the E.U. is not only prepared to receive and handle this oil but also it is facing a decrease in its oil imports given the current political situation in suppliers such as Libya. Last week, a leaked classified document proved that the E.U. is pressing the U.S. to lift the ban.
Taking advantage of the new scenario
Some companies have already seen the potential of this new scenario and are taking advantage of it. Continental Resources, for instance, already applied for a swap license last month and is expecting to hear from the Commerce Department soon. What's the idea? Crude swap licenses, which basically mean exchanging U.S. crude for foreign oil, look appealing for the company. Domestic demand for oil remains high, and being able to arbitrage the difference in prices between the two different types of oil looks interesting (and is quite feasible).
Even if Continental does not get the swap permission, there is another interesting possibility to capture margins in this new context. The case for Pioneer Natural Resources, which is one of the few companies benefited by the condensate oil export ruling, can work as an example.
Pioneer is an independent oil production company without refining operations. For years, refineries have been running quite a profitable business, operating at full capacity while paying a discount for domestic crude oil.
If this situation continues (increasing production with no crude exports), there will be soon more oil than local refineries can handle. If ultra-light crude oil is an eligible product for exports, companies such as Pioneer and Continental have an incentive to build their own mini-refineries to process condensates and keep the margins that would otherwise go to the refiners.
When the ban on exports started, its main goal was to keep domestic oil reserves at home and protect local consumers from price shocks. The situation is different now, however, and the ban is pushing price distortions that generate incentives to put pressure for a ban lift. Washington is aware.
Although the export ban still remains, a relaxation of the law looks quite probable. Both Pioneer and Continental are making the right decisions in order to seize the opportunity as soon as possible. Being on the cutting edge in this kind of situation can make a great difference. Any positive change in the law will automatically generate profits for these two companies.
Crude oil swaps are being reviewed on a case-by-case basis. Given the current situation, though, the government may show some flexibility. Regardless, it is worth the shot for the E&P companies to present their cases.