On December 30, 2014, the U.S. Department of Commerce Bureau of Industry and Security (BIS) published a number of frequently asked questions (FAQs) that provide new guidance on several aspects of the U.S. government's general prohibition on the export of crude oil. In particular, the FAQs provide clarification on the criteria BIS will use to assess whether liquid hydrocarbons have been processed through a distillation tower such that they are no longer considered to be crude oil subject to the general export prohibition.
Although repeal of the 1970s era ban on the export of crude oil is high on the list of many members of Congress, such exports from the United States are currently prohibited by the Energy Policy and Conservation Act of 1975 (EPCA) absent a presidential exemption based on “the national interest and purposes” language of the EPCA.
BIS administers the EPCA’s export restriction through the Short Supply Controls set forth in its Export Administration Regulations (EAR). The Short Supply Controls impose license requirements on the export of crude oil and authorize BIS to issue export licenses for certain transactions, including for certain narrow categories of crude oil, as follows:
- exports from Alaska’s Cook inlet;
- limited exports to Canada for consumption or use in Canada;
- exports in connection with refining or exchange of oil from the Strategic Petroleum Reserve;
- limited exports of heavy crude from California;
- exports that are consistent with findings made by the President under certain statutes; and
- exports of foreign origin crude oil if they are not co-mingled with domestic crude oil.
The Short Supply Controls also direct BIS to review other applications to export crude oil that do not fall under one of the listed exemptions above on a “case by case basis” and to approve such applications if the proposed export is “consistent with the national interest” and the purposes of the EPCA. Nonetheless, only very limited exports have been approved under this authority.
The Short Supply Controls provide that lease condensate that has been "processed through a crude oil distillation tower" is not crude oil subject to the EPCA’s export prohibition, but rather a petroleum product classified as EAR99 (EAR99 items are subject to the lowest level of export restrictions under the EAR.) BIS's December 30, 2014 FAQ provide guidance for the first time on how BIS will determine whether liquid hydrocarbons processed through a crude oil distillation tower should be classified as crude oil or petroleum products. According to the FAQs, liquid hydrocarbons qualifying as a petroleum product must have undergone “material processing” through a crude oil distillation tower. If there is no processing in the distillation tower, or if the processing is de minimis, the liquid hydrocarbon will instead be classified as crude oil. In particular, crude oil processed through equipment that utilizes pressure reduction alone to separate vapors from liquid, or pressure changes at a uniform temperature, such as flash drums with heater treaters or separators, does not qualify as a petroleum product and remains classified as crude oil.
The FAQs enumerate six specific factors that BIS considers when determining whether a hydrocarbon product has been processed through a crude oil distillation tower, including:
- whether the distillation process materially transforms the crude oil, by using heat to induce evaporation and condensation, into liquid streams that are chemically distinct from the crude oil input;
- the change in API gravity between the input of the process and the output of the process;
- the change in percentage of different types of hydrocarbons between the input and output of the process;
- whether the streams resulting from distillation have purposes other than allowing the product to be classified as exportable petroleum products, such as use as petrochemical feedstock, diluent, and gasoline blendstock;
- whether the distillation process utilizes temperature gradients and has significant internal structures, such as trays or packing, and differentiated output streams;
- whether the distillation uses towers with more mechanical complexity and heat, higher residence time, internal structures that promote condensation and better separation, and consistent quality liquid streams (also called cuts or fractions) than equipment used to separate vapors and liquids for transportation needs.
According to the FAQs, these factors are not categorical or exhaustive. BIS will look at the particular circumstances of each commodity classification application to determine whether the output of a process can be considered a petroleum product under the current regulatory definition. BIS encourages companies to seek commodity classifications if there is a question whether a particular distillation process exempts the lease condensate from the crude oil prohibition.
The FAQs also address whether there is any de minimis amount of U.S.-origin oil that can be co-mingled with the foreign-origin oil. The Short Supply Controls allow exports of foreign-origin crude oil (with a valid license from BIS) if the foreign-origin crude oil is not co-mingled with domestic crude oil. The FAQs state that BIS understands that a minimal amount of mixing may occur due to incidental contact in pipelines and/or storage tanks when foreign- and U.S. origin-oil is sequentially transported or stored in the same pipeline or tank. However, rather than providing a specific de minimis threshold, the FAQs encourage applicants for export licenses for foreign-origin crude oil to include in their applications an explanation of the precautions they take to prevent U.S. crude oil from being mixed with the foreign-origin crude except in instances of incidental contact.