On June 24, 2014, the Bureau of Industry and Security (BIS) of the Department of Commerce issued two advisory opinions (AOs) allowing for the export from the United States of what was reported to be “unrefined” oil. The general reaction among industry professionals was surprise, given the long-standing statutory and regulatory framework prohibiting the export of crude oil from the United States due to concerns regarding protection of the domestic oil supply. Ultimately, however, it has become clear that the initial reports overstated the breadth of the AOs on two key fronts: (i) the AOs apply to a type of liquid hydrocarbon called “condensate,” and (ii) the AOs apply to lightly refined natural gas condensate, not “unrefined” condensate. While these limitations combine to reduce the overall impact of the AOs and bring them into line with existing national policy, the AOs are likely to have a significant and lasting impact on the domestic hydrocarbon market as well as on the national energy policy.
Natural Gas Condensate
The AOs apply to liquid natural gas condensate only, not to crude oil or liquefied natural gas. There are three types of crude hydrocarbons that are generally extracted through drilling: crude oil, natural gas and natural gas condensate. Crude oil and natural gas are well understood: crude oil is a thick liquid that exists in liquid form both in the reservoir and after extraction, and natural gas is a colorless gas that, unless artificially compressed, exists as a gas both in the reservoir and after extraction. Natural gas condensate, however, sits somewhere between the two. At the higher temperatures found in underground hydrocarbon reservoirs, the molecules making up the condensate (usually pentane, hexane and heptane with some butane added in) are in their gaseous form. When these hydrocarbons are brought to the surface, however, the much lower temperature causes the molecules to condense out of their gaseous form and into their liquid form, creating natural gas condensate.
The key to the AOs—and understanding exactly what liquid has been approved for export—is that some of the molecules in natural gas condensate are liquid at surface temperatures and pressures only by the slimmest of margins. In addition, not all hydrocarbon reserves produce natural gas condensate. The Barnett Shale formation in North Texas, for example, produces negligible natural gas condensate and is known as a “dry” gas play. The Bakken Shale formation in North Dakota produces prodigious amounts of natural gas condensate, but the area lacks the necessary infrastructure to process and transport the condensate. The Eagle Ford Shale formation in South Texas, the source of the exports covered by the AOs, produces vast quantities of natural gas condensate, and there is in place an adequate processing and transportation infrastructure to handle these liquids.
The process of refining liquid hydrocarbons typically involves expensive facilities and equipment, starting at a cost in the mid-nine figures and quickly escalating to over $1 billion to construct. Even so-called “mini-refineries” that utilize very basic distillation towers and splitters to refine and separate crude oil into its constituent hydrocarbons, “refining” it just enough for export in compliance with current U.S. law, are expensive. For example, a mini-refinery currently under construction in Houston, Texas is estimated to cost nearly $360 million to build—1/10 the cost of a full-size refinery with similar processing capacity. The “refined” product from these mini-refineries must be refined further to be used, but it is refined enough to be eligible for export.
Distillation towers, effectively large silos built to contain and process liquid hydrocarbons, are the first stop for crude oil in a modern refinery. The oil is heated in the distillation tower so as to become a suspension, with bands of different liquid hydrocarbons at various levels based on the weight of the hydrocarbon. “Splitters,” or pipes connected to the distillation tower at various heights, siphon off the different liquids for further processing and purification. To achieve cost savings, mini-refineries use a distillation tower and splitter without significant additional processing equipment. The use of a distillation tower alone without a splitter would dramatically decrease the cost involved in the refining process even further: nonsplitter distillation towers with the same processing capacity as a mini-refinery are estimated to cost a mere $50 million to construct. It is possible that the liquid covered by the AOs was created by sidestepping the cost of even a mini-refinery by utilizing distillation towers alone and avoiding the use of a splitter altogether.
Although the specifics of the distillation tower stabilization process used to create the product covered by the AOs are not publicly available, it appears that the natural gas condensate could be run through the distillation tower—also known as a stabilizer—without the use of the splitters or any other facilities. The process would involve the following steps: (i) condensate is pumped into the distillation tower and heated; (ii) the “lighter” or more volatile molecules (usually butane blends) boil off and are either separated and captured or flared off; and (iii) the remaining liquid is pumped out of the distillation tower. This liquid is less volatile than the pre-distillation liquid and has technically been “refined,” but just as with a mini-refinery, the resulting lightly refined liquid will require further refining before it can be used.
The AOs issued by the BIS establish that the processes used to create the liquid that is pumped out of the distillation towers result in a liquid that is “refined” enough for export purposes under current U.S. law.
Though the AOs are significant—and open the door for large volumes of exports from the Eagle Ford Shale play in Texas and, depending on infrastructure upgrades, the Bakken Shale play in North Dakota—important questions remain. For example, it is unclear what level of processing and heating is required in the distillation towers. As noted, the specifics of those processes are as yet unknown, so whether the barest of heating is required or whether a specific threshold must be met are open questions. Further, it is unclear whether a distillation tower is necessary to pass regulatory muster at all—would it be possible to accomplish the same volatile-molecule extraction without using a distillation tower? If that were possible, would BIS grant a similarly favorable AO? In light of these questions—and many others—we anticipate additional classification requests to the BIS concerning proposed exports of natural gas condensate.