A key US senator on Thursday advocated for supply swaps of light crude and condensate produced from US shale plays in exchange for heavier foreign oil grades, a proposal analysts say makes little economic sense for American producers, but which could become a potential option if market fundamentals shift.
In a report released Thursday, Alaska Senator Lisa Murkowski, the top Republican on the Energy and Natural Resources Committee, pushed for these petroleum swaps as a temporary alternative to current US restrictions on crude oil exports. Such swaps would not require a new rulemaking from the US Commerce Department or a presidential finding, the report said.
The report was unveiled as the White House studies a potential change to crude export restrictions imposed during the 1973 Arab oil embargo and many US producers press for policy changes, from changing the definition of lease condensate as crude oil to dropping export restrictions entirely.
The report prepared by Murkowski's staff attempts to build the case that petroleum exchanges, or swaps, could somewhat alleviate a potential domestic glut of light, sweet oil without a presidential action or time-consuming agency rulemaking, according to Robert Dillon, a Murkowski spokesman.
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"Light tight oil and condensate produced in shale plays could be transported to nearby nations in return for heavier crudes that could be processed in US refineries," the report states. "Exchanges cannot solve the mismatch between refineries geared to process heavy crudes and record production of lighter grades of petroleum, but they would be a partial measure that could help alleviate some of the glut."
Analysts said this week that frequently discussed swap option would be Light Louisiana Sweet for Mexican Maya, but would need a narrow spread, which one analyst said would need to be between $6/b to $8/b, for a sustained period of time for US producers to pursue this.
The LLS-Maya spread had narrowed to $7.55/b on May 5, but climbed as high as $11.32/b last week. On a 30-day moving average the LLS-Maya spread is around $9.32/b and was at $11.24/b on Wednesday.
"At this point [a swap is] not really a viable option," one analyst said. "But, I think all companies are trying to keep their options open."
ClearView Energy Partners analyst Kevin Book said that for a swap to work, prices would have to be advantageous on both sides of the deal, a result which may require multiple related, but linked trades, such as shipping condensate to one foreign market, exporting another product to Mexico and importing Maya, or another heavy, crude.
"You might send condensate out and you might bring in gasoline or diesel fuel," Book said. "There's a lot of different ways to architect the swap the problem is that everything you're going to send out is going to pay the freight both ways, so you're going to have a double transportation premium and a transaction cost."
In addition, each swap requires approval from the Commerce Department's Bureau of Industry and Security, another hurdle which could add costs to potential exporters.
Multiple sources said it was unclear whether any US firm had requested such a swap, but said BIS officials do not release information on companies who express initial interest in such actions.
A BIS spokesman did not return a call for comment Thursday.
The Murkowski report summarizes the legal precedent for such petroleum swaps since the Nixon administration, which include an early agreement with Canada, temporary exports through Panama and exemptions for Alaskan exports.
In the mid-1970s, faced with refining capacity constraints resulting from new crude export bans, the US and Canada reached an agreement which allowed US produced or imported crude to be shipped to Eastern Canada in exchange for an equal amount of Alberta-produced crude to be shipped to refineries in the US Midwest. This agreement was abandoned in 1985 after President Reagan authorized oil exports to Canada, the same year his administration allowed exports of certain Alaskan crude.
"Vast historical precedent exists for the authorization of oil exchanges between the United States and nearby nations," the report states.
Murkowski has become a leading advocate of relaxing current US crude export policy as Obama administration officials have said they are studying a potential policy change.
US Energy Secretary Ernest Moniz said last week that the issue is being studied since the light, sweet crude oil being produced in the US amid the ongoing shale boom is mismatched with current refining capacity, set up for heavier, sour crudes.
--Brian Scheid, firstname.lastname@example.org
--Edited by Derek Sands, email@example.com