Recent press reports covering the sale and export of lightly processed condensate from the Eagle Ford Shale have characterized such transactions as a major test to the four-decade-long ban on crude oil exports, and a sign that the ban is crumbling.1 They are not exactly that. However, as condensate exports become more common, they will raise important compliance questions for would-be purchasers.

The so-called “Short Supply Controls” that govern restrictions on crude oil exports are alive and well. Unprocessed crude oil still cannot be exported without a license and, while the Bureau of Industry and Security (“BIS”) frequently grants licenses for the export of Canadian-origin crude, exporters are essentially blocked from exporting U.S.-origin crude to any country other than Canada. So what has changed?

What has changed is the industry’s understanding of what amount of “processing” is necessary to transform crude oil into a petroleum product that can be exported without a license. In March of this year, BIS issued commodity classification rulings to Pioneer Natural Resources and Enterprise Product Partners, determining that their lightly processed lease condensate does not constitute “crude oil” under the Short Supply Controls. The Export Administration Regulations (“EAR”) specify that lease condensate is within the definition of crude oil; however, the EAR also exempts from the definition of crude any oil that is “processed through a crude oil distillation tower.” 15 C.F.R. § 754.2(a). BIS determined that this exception applied with regard to the Pioneer and Enterprise condensate, which took many by surprise because the processing involved amounted to little more than the stabilization producers undertake to ensure crude is safe for transportation.

In the wake of the Pioneer and Enterprise rulings, numerous parties requested their own rulings from BIS. It is inevitable, however, that some parties will market condensate without seeking a ruling—self-classifying their product as being sufficiently processed and eligible for export. Such self-classification is perfectly legal and even encouraged by BIS, provided it is accurate. However, exporters face serious civil and criminal penalties if a misclassification leads to an unauthorized export. The risk of misclassification also raises concerns for purchasers. For example, in the absence of a BIS ruling, how does a purchaser know a shipment of condensate is sufficiently processed to be eligible for export without a license? Are there regulatory risks associated with purchasing such condensate, even when another party is the exporter of record?

The exporters themselves are not the only parties exposed to penalties for violations of the Short Supply Controls. Indeed, the EAR makes clear that “no person” may “buy” or “transport” a product “with knowledge” that it is being exported in violation of the EAR. 15 C.F.R. § 764.2(e). Nor may a buyer act in such a way that is construed to be a solicitation, attempt, or action to “aid, abet, counsel, command, induce, procure, or permit” a violation. Id. § 764.2(b)-(d). In light of BIS enforcement actions in other contexts, it is clear that purchasers risk potentially serious penalties if they purchase crude oil they knew, or should have known, was exported in violation of U.S. law. It is crucial, therefore, that purchasers take a close look at any condensate being offered for export and, working with counsel, (1) perform reasonable due diligence to confirm the product’s classification; and (2) negotiate appropriate purchase agreement terms to protect the purchaser’s interests.