Over the past several weeks, we’ve focused our analysis in this series on the legislative efforts that are currently underway to continue loosening restrictions on the export of U.S. crude oil and the impacts that any such loosening would have internationally. In this issue, we’ll examine the impacts that additional markets for U.S. crude oil would have on the markets and participants in the United States.
Impacts in the U.S.
Over the last year, in response to a sharp drop in the price of crude oil around the world, the oil and gas industry in the U.S. dramatically and quickly scaled back drilling and completions activities. While those scaled-back operations did not lead to an immediate and proportionate reduction in oil and gas production, this rapid response shows just how price sensitive production in the U.S. can be. Some in the U.S. oil and gas industry seem to believe that ending the crude oil export ban would provide the price supports necessary to re-invigorate production activity. We think that belief, albeit attractive, is overstated at best. And in any event, we’ll leave the prognostications on crude oil pricing to others. What we are confident about, however, is that allowing U.S. crude oil production to be exported into overseas markets would have a dramatic effect on the oil and gas markets and participants in the U.S. Here are just a few of the biggest impacts we expect:
- Demand for U.S. light crude will stabilize: The Energy Information Agency (EIA) forecasts U.S. crude oil production to peak in 2020 at 22.18 quadrillion BTU (a “quad”), as well as another 5.48 quads of natural gas liquids (NGLs). In that same year, EIA expects the United States to consume 37.06 quads of petroleum and other liquids (EIA, Annual Energy Outlook 2015, Table: Total Energy Supply, Disposition, and Price Summary). Without digging below the surface, then, it would seem as if demand in the U.S. should continue to outstrip supply and that any exports of crude oil out of the U.S. would be unnecessary or, even worse, risky. So let’s dig below the surface.
The truth is that the U.S. has struggled to fully capitalize on the opportunity created by the dramatic increases in the production of U.S. crude oil because of the characteristics of that oil. Many of the oil refineries in the U.S. were built to refine heavier or mid-grade crude oil imported into the U.S. Increased production of light sweet crudes resulting from the U.S. shale oil boom has led to an over-supply of light sweet crudes in the U.S. as those refineries struggled to refine a new grade of oil. This over-supply has turned markets, which have historically paid a premium for such crudes, on its head. As noted in our prior issues in this series, the recently approved exchanges of U.S. light crude for heavy crude produced by PEMEX benefits both the U.S. and Mexico by providing a new market for U.S. light crudes at a low cost to U.S. refiners and by providing better crude oil inputs for Mexico’s refineries. But the exchange is not of such a magnitude that it will change the fundamental economic conditions affecting the industry. Similarly, a broader relaxation of the restrictions on the export of U.S. crude oil, while beneficial to the oil and gas industry and the U.S. energy economy, will not create a radical shift in the fundamental economics of upstream production. What it will do, however, is allow the industry to more efficiently exchange grades of crude oil with partners around the world while providing new markets and price supports for domestically produced oil that is in over-supply in the U.S. market. Opening the international marketplace to U.S. crude oil should allow U.S. companies (both consumers and producers) to participate fully in the global marketplace in their efforts to secure the right mix of heavy crude, light crude, condensate, and NGLs for the needs of U.S. consumption while allowing any over-supply of inputs to leave the U.S. market for markets that can more efficiently use them.
- U.S. oil infrastructure will have to adapt: Changes in the markets and arbitrage opportunities will shift the demands on the infrastructure in the U.S. that is used to move oil around the country to satisfy these markets and opportunities. An end to the U.S. crude oil export ban would be met quickly with the filing for export licenses from oil companies and facilities around the country. To capitalize on new opportunities quickly, we would expect export players to seek capacity and export authorization from existing facilities. But over time and perhaps very quickly, the increase in the demand for exporting liquids should support the development of additional storage and export facilities, as well as pipelines and other transportation infrastructure needed to bring the crude oil to these facilities. Those players able to secure export authorizations first will enjoy significant advantages, particularly if reactions from interest groups opposed to crude oil exports intensifies after those exports begin, which could significantly delay the receipt of authorizations for those whose applications are not first in line.
- Foreign investors will be more likely to invest in U.S. production: Investment by foreign investors in U.S. oil and gas assets has increased dramatically since the shale oil boom began. But there is room for additional investment, and an end to the ban on U.S. crude oil exports would give current and new investors more reasons to invest in U.S. production. Chief among these reasons, at least for some types of investors, would be the opportunity to invest in oil producing assets that could actually supply, or support actual supply through exchanges, exports of crude oil to satisfy demand for crude oil in the investor’s home country.
Moving quickly will be crucial to seizing the opportunities created by an end to the ban on U.S. crude oil exports. Preparing to move quickly starts now. Whether it’s on regulations, commercial agreements, project development, or investments in U.S. assets, with over 500 lawyers working for energy sector clients throughout our global network of offices, we stand ready to help you prepare and capitalize on new opportunities.