Performance and current state of U.S. crude oil exports

The ban on U.S. crude oil exports was initiated in 1975 with the passing of Section 103 of the EPCA and went into full effect in the 1980s; however, even though the ban remained in place for 35 years, exports of U.S. crude oil continued in small amounts.

Figure 4-14. U.S. Crude Oil Exports Prior to the Removal of the Export Ban

Source: Jae-kyung Kim (2014)

Although the export ban was enacted in 1975, it was partially lifted in 1980 to allow for limited exports in exceptional cases. For example, in November 1995, the export of crude oil produced in the Alaskan North Slope region (ANS crude oil) was officially recognized as an exception to the 1975 ban, and in 1996, total exports of 36,000 b/d were exported to the three East Asian countries of Korea (50%)²⁴, Japan (36%), and China (12%) (up until 1999). These exports gradually increased to 74,000 b/d in 1999 but were suspended once again after 2000 (Bamberger, 2008; Jae-kyung Kim, 2014).

U.S. crude oil exports significantly declined but began to rapidly increase beginning in 2011. By late 2011, exports rose to around 60,000 b/d, and in 2013, they more than tripled to a total of 200,000 b/d (Citigroup Inc. 2013; Jae-kyung Kim, 2014). Most of this approximately 98 percent increase was derived from the rapid increase of exports to Canada. This increase stemmed from the rising demand of oil refineries in eastern Canada for U.S.-produced LTO, which was relatively cheaper than oil from other sources (Oil Change International, 2013; Jae-kyung Kim, 2014). With the rapid increase in LTO production in the U.S. at that time, U.S.-produced LTO was cheaper than LTO from the Middle East or West Africa, which had to rely on oil tankers to transport their oil to Canada. These differences in price led to an explosive demand for U.S-produced LTO among the oil refineries in eastern Canadian²⁵ that had previously depended on

24 From 1996 to 2000, exports of U.S. crude oil to Korea were mostly composed of ANS crude oil. ANS crude oil exports to Korea totaled 2,100 b/d in 1996 and increased to 36,900 b/d in 1999 before being suspended in 2000 (Jae-kyung Kim, 2014).

25 Oil refineries in eastern Canada invested only in facilities that mainly processed LTO instead of upgrading facilities for the processing of Canadian dilbit produced from oil sands. As a result, eastern Canadian refineries had to rely on LTO supplied by the

LTO from the Middle East and West Africa.

B. Current state of U.S. crude oil exports following the removal of the export ban

As mentioned above, the legal and institutional regulations prohibiting U.S. crude oil exports were officially removed on December 18, 2015. This greatly changed the overall environment of the U.S. oil industry—from an industry in which limited crude oil exports were only permitted in exceptional cases with the authorization of a BIS export license, to an industry in which anyone could export crude oil at any time without any restrictions. Immediately following the removal of the export ban on December 31, 2015, the first shipment of a total of 600,000B in U.S. crude oil exports (purchased from ConocoPhillips by the Swiss company Vitol) was loaded and departed from an export terminal in Corpus Christi²⁶, Texas. This shipment marked the first U.S. crude oil export²⁷ without an export license since the beginning of the ban.

Although the first export of U.S.-produced crude oil was shipped to Vitol in 2015, it wasn’t until the following year in 2016 that U.S. crude oil exports really began in earnest. From January to May of 2016, the average export volume of U.S. crude oil was 500,000 b/d, which was an increase of around 8 percent up from the average export volume of 460,000 b/d in 2015 (total 76.1 million B) (EIA, 2016h). In May 2016, the monthly export volume reached 660,000 b/d (EIA, 2016c), which was the first time in history that it exceeded the monthly average of 600,000 b/d in. Considering that a rapid increase in export volume was also seen with the export of LTO to Canada in the years following 2011, it may be a little too early to be able to determine whether the January to May 2016 increase in export volume is directly due to the lifting of the ban. However, evidence strongly supports an accelerated monthly increase in 2016.

Figure 4-15. Changes in U.S. Crude Oil Exports After the Removal of the Export Ban

Source: EIA (2016c)

천b/d One thousand b/d

가 가 가 가 가 가 가 가 Crude oil exports to Canada

가 가 가 가 가 가 가 가 가 가 가 가 Crude oil exports to countries other than Canada 가 가 가 가 가 가 가 가 Removal of U.S. crude oil export ban

It is worth noting that exports to Canada, which accounted for most of the U.S.’s crude oil exports prior to the removal of the export ban, have continued to decline since deregulation. In May 2016, exports to Canada fell by 50 percent;

Middle East or West Africa; LTO from these areas had to be transported across the Atlantic Ocean via oil tankers, which increased costs (Jae-kyung Kim, 2014).

26 World Energy Market Insight, Issue No. 16-1, Jan. 8, 2016

27 This cargo arrived in France on January 20, 2016, three weeks after departing from the U.S. Vitol, one of the world’s greatest independent crude oil traders, announced that it would be supplying U.S.-produced crude oil to the Cressier and Varo Energy refineries in Switzerland through pipelines. For reference, these refineries are operated by Varo Energy, a joint venture between Vitol and Carlyle (World Energy Market Insight, Issue No. 16-4, Jan. 29, 2016).

however, the volume and proportion of exports to countries outside Canada are quickly on the rise.

From January to May 2016, the largest importer of U.S-produced crude oil, aside from Canada, was Curacao, an island state in the Caribbean north of Venezuela, which imported an average of 54,000 b/d (total 8.2 million B) of U.S. crude oil during this time. Curacao is home to the Isla refinery and storage facility, which is operated by PDVSA (a Venezuelan state-owned oil company) and has a refining capacity of 330,000 b/d. The U.S.-produced LTO imported by the Isla facility is mixed with LTO produced in Venezuela and refined to be re-exported to the major clients of PDVSA.

After Curacao, the Netherlands is the largest importer of U.S-produced crude oil, recording an average import volume of 39,000 b/d (a total of 6 million B). Given that the Netherlands has a major oil hub in Amsterdam, Rotterdam, and Antwerp (ARA), it most likely imports U.S. crude oil for brokering transactions with inland European countries rather than to meet its own domestic demands. Italy, France, and the U.K. are also among the European countries that are actively importing U.S. crude oil.

Figure 4-16. U.S. Crude Oil Exports to Countries Other than Canada (Jan–May 2016)

Source: EIA (2016c)

큐라소 Curacao

네덜란드 Netherlands

일본 Japan

이탈리아 Italy

마샬제도 Marshall Islands

프랑스 France

영국 U.K.

바하마제도 The Bahamas

중국 China

파나마 Panama

이스라엘 Israel

니카라과 Nicaragua

콜롬비아 Columbia

스위스 Switzerland

페루 Peru

As seen in Figure 4-16 above, countries in Central and South America and northwestern Europe are the top importers of U.S. crude oil (mainly low sulfur tight oil). Countries in Central and South America that have refineries with significantly low upgrade rates had previously imported around 300,000 b/d of crude oil (mainly low sulfur tight oil), mainly from West Africa. After the lifting of the ban on U.S. crude oil exports, some of these countries have shown an interest in replacing West African imports with U.S. crude oil imports. As for northwestern Europe, a considerable number of its refining facilities are optimized to process crude oil (low sulfur tight oil) produced in the nearby North Sea. However, due to the recent decline in the production of the North Sea oil fields, countries in northwestern Europe have had to additionally import around 3 million b/d from Libya or West Africa (also low sulfur tight oil). Given these considerations, it is not surprising that several countries in Europe are also exploring the possibility of replacing some of these West African crude oil imports with U.S. crude oil imports. Should these replacements significantly increase, West African crude oil producers may seek new export destinations and enter the Asian markets (IHS, 2014).

Following the lifting of the U.S. crude oil export ban, countries in East Asia also began importing U.S. crude oil. From January to May 2016, U.S. crude oil totaling 17,000 b/d was imported by Japan, and 10,000 b/d was imported by China.

During this same period, the Marshall Islands located in the Pacific Ocean also imported U.S. crude oil. However, in each of these cases, is unlikely that the country of import was the import’s final destination, but a middle platform for re- export to Asia (EIA, 2016c). As a matter of fact, Asia, in particular Southeast Asia, is now likely to emerge as a new destination for U.S. crude oil. Imports to this region have not yet being made in full scale, but developing countries in Southeast Asia are now installing new upgraded refining facilities in order to satisfy increased oil demands. This in turn has heightened the demand for low sulfur tight oil (IHS, 2014) and subsequently U.S. crude oil, which has the same properties.

C. Diversity in the export of U.S. crude oil after the removal of the ban

As mentioned previously, the size of U.S. crude oil exports is ultimately determined by the WTI-Brent Spread, and a balanced Brent-WTI Spread that reflects the overall costs of transporting crude oil from the Cushing trading hub to the Gulf of Mexico and from the Gulf of Mexico to the European markets can be placed at around $5.5–6/B. After the ban on exports was removed in 2015, the Brent-WTI Spread plummeted to under $1/B, making long-distance exports of U.S.

crude oil in large quantities unprofitable. This lack of economy is the main reason for the current lack of long-term, large- scale export agreements (Atlantic Council, 2016).

Nevertheless, U.S. crude oil exports have recently increased because even though the spread between oil prices is very small, there are still a variety of different export opportunities. These opportunities can be found in connection with variances in crude oil transportation logistics²⁸ costs, including the decrease of ocean freight rates (specially the decrease in oil tanker reservation costs). Not only have recent low oil prices brought down the price of oil tanker charter fees, but industry leaders are also using various charter options to save freight costs. These different factors are being used to ensure more profitable crude oil exports despite a low spread.

In addition to decreased tanker reservation costs, the principle of “backhaul” is currently being used to minimize transportation costs. “Backhaul” is when a ship transports cargo on its return (or part of its return) to its place of origin in order to minimize the time/distance during which it is carrying an empty load; this is done to secure minimum profits²⁹. The use of backhaul enables the transportation of crude oil at discounted prices³⁰ compared to regular charter fees. Prime examples of backhaul include the cases in which Aframax and Panamax oil tankers from Mexico and Venezuela transported tight oil to the Gulf of Mexico (U.S.), and on their return, transported U.S. tight oil to Curacao and other destinations at a charter fee discount, thereby securing export profitability.

Another way in which export profitability can be secured is by trading certain types of U.S.-produced crude oil at a discount (less than their WTI prices) according to their properties (for example, their proportion of API and sulfur). These certain types of crude oils can be traded at a discount due to their difference in quality compared to West Texas

28 Logistics costs in transporting crude oil generally include the costs associated with transporting the crude oil from the producing regions to the port of export (P/L usage fees, etc.) as well as storage costs at the terminal, shipping fees, ocean freight costs, and charter fees.

29 Naver Shipping and Navigation Terminology Dictionary

(http://terms.naver.com/entry.nhn?docId=2428497&cid=42329&categoryId=42329; date of search: October 2, 2016)

30 Ship owners offer a considerable discount on charter fees when operating backhaul since they would otherwise have had to return with an empty ship.

Intermediate (WTI), a representative type of U.S. crude oil. In these cases, a meaningful spread can still be secured to generate export opportunities even when there is almost no meaningful Brent-WTI Spread.

Yet another way to secure export profitability is to utilize sample or test cargo, which is used for tests to see how a certain type of crude oil responds in a certain refining facility. With a view toward future sales, U.S. crude oil exporting companies are implementing marketing strategies to secure the export market and offering samples or test cargo at discounted prices. Shipments of sample or test cargo are usually based on single export contracts for cargo units rather than long-term export contracts. Importers of U.S.-produced crude oil can become accustomed to importing crude oil from the U.S. or test the technological adaptability of the crude oil by putting it into the local refinery; a successful test shipment can not only predispose the importing country to make other transactions with the exporter but also generate continuous long-term contracts. This kind of export marketing strategy is currently being used in small-scale export transactions across Europe, China, and Japan. In fact, the first transaction of U.S. crude oil with Vitol following the removal of the export ban was that of test cargo.

Despite these different methods, strategies for increasing export profitability that focus on transport costs are rather limiting. Furthermore, fundamental market conditions, such as securing a sufficient Brent-WTI Spread, must be met in order for small-scale test cargoes to lead to long-term, large-scale export contracts. In other words, increased production of U.S. crude oil and a higher Brent-WTI Spread, among other factors, are essential to increasing U.S. crude oil exports;

however, as previously explained, this seems unlikely in the short-term.

Of course, even if market conditions are met, the expansion of U.S. crude oil exports is restricted by the maximum scale of crude oil that can be accommodated by the logistics infrastructure currently in place for crude oil transportation.

As we will examine in the next chapter, the port infrastructure of the Gulf Coast was largely designed and maintained to meet the needs of the oil industry over the past forty years, a time during which the ban on U.S. crude oil exports was in place. With the current level of U.S. crude oil exports (with no significant expansion following the lifting of the ban), there is no worsening of congestion in the export logistics infrastructure or disruption of exports processing due to a lack of capacity. However, if there is a change in the low oil price trend and fundamental market conditions are met, increases in U.S. crude oil exports could face another barrier—a lack of the necessary export infrastructures in the Gulf of Mexico.

Chapter 5. Infrastructure for U.S. Crude Oil Exports