The Ability to Export Domestic Crude Oil and the Effect on Shipping

By Dave Cooley, GHPB

Exporting U.S. crude oil will effect world shipping arrangements and trade routes. This ability may not necessarily create a need for additional ships, but will result in a realignment of shipping patterns. For example, a tanker discharging crude oil at a major U.S. oil port along the Gulf or West Coasts can now have the opportunity to load crude oil for export as opposed to leaving the port in ballast. This offers tanker owners a unique cost saving ability and improves efficiency in the tanker market.

Background
After the Arab-Israeli War (October 6-25, 1973), the OPEC countries imposed an embargo on nations supporting Israel, including the United States. OPEC banned petroleum exports to embargoed nations and cut oil production. The immediate effect created a disruption of supply and ultimately resulted in a “fear” shortage within the United States. To ensure domestic oil supplies were available to U.S. consumers, Congress passed the 1975 Energy Policy and Conservation Act, which directed the President to ban crude oil exports except in select circumstances. This restriction regarding the export of domestic crude oil was recently repealed by the Consolidated Appropriations Act, 2016 signed on December 18, 2015 and U.S. produced crude oil is now traded freely in the worldwide oil market.

U.S. Oil Production
U.S. oil production reached a peak of 10,044,000 barrels daily during November 1970, which has yet to be equaled. A second peak of 9,173,000 barrels daily occurred during February 1986 as oil production from Alaska was fully online. Finally, a third peak of 9,694,000 barrels a day occurred during April 2015 as a result of oil shale development predominantly in Texas (Eagle Ford), North Dakota (Bakken), and Colorado/Wyoming (Niobrara). See Figure 1

figure-1
Domestic crude oil production’s nadir occurred from mid-2005 through the end of 2008 at around 5 million barrels daily. During the early years of the previous decade, hydraulic fracturing oil shale formations were sufficiently successful to the point that shale oil production began to overtake conventional oil production. As a result, U.S. oil production rose from a low point of about 5 million barrels per day during the 2005 through 2008 period to about 9,694,000 barrels daily in April 2015. This phenomenal increase in U.S. oil production created a surplus to the high quality-low sulphur oil supply needs of the country and was a significant factor contributing to a worldwide crude oil surplus that precipitated a drop in the oil price from over $100 a barrel in mid-2014 to around $29 a barrel in February 2016.

Exports of Domestic Crude Oil
The ability to export domestic crude oil has a history from the early days of the industry. In these early times, having access to the world market was an essential outlet and provided some element of price support during those early years as the U.S. oil resource base expanded from the initial discoveries in Pennsylvania, then to Texas, and then on to California. See Figure 2

figure-2
Initially, U.S. crude oil exports grew as oil production grew. The periodic spikes in U.S. crude oil exports are generally attributed to the occurrence of various exogenous events usually related to political conflict. Highlighting of some of the major events that created these spikes in crude oil exports includes:

  • The first major run-up occurred during the middle 1930’s prior to World War II and continued for 20 years (from about 1934 -1954). U.S. crude oil supplied the allies during the war, supported war reconstruction in both Europe and Japan after the war, and was a key oil supplier during the Korean Conflict.
  • The second spike happened in July 1956 when Egypt nationalized the Suez Canal and Israel, the United Kingdom, and France invaded Egypt to secure the Canal; an effort that was thwarted by the United Nations. U.S. crude oil exports supplied the general market.
  • The third up-tic occurred about 10 years later as Israel pre-empted a potential invasion and struck Arab Forces mobilizing in the Sinai (Egypt) during June 1967. This was the third Arab-Israeli War and is generally referred to as the Six Day War. Again, U.S. crude oil exports supplied the needs of the general market.
  • Another Arab-Israeli conflict occurred again during October 1973 when Egypt and Syria launched a surprise attack against Israel, which Israel repulsed. U.S. crude oil exports during this time were de minimis.  Following this adventure, however, the Arab Members of OPEC created a politico-economic response by announcing an oil boycott against Canada, Japan, the Netherlands, the United Kingdom, and the U.S. which lasted from October 1973 to March 1974. During this time period, the price of oil trebled from $3 a barrel to $12 a barrel.
  • The fourth upturn in U.S. crude oil exports was precipitated by the Iranian Revolution in 1979 followed by the Iran-Iraq War which lasted from 1980-1988 during which times oil exports initially from Iran and then from Iraq were severely limited due to hostilities. This up-tick was further sustained by Iraq’s invasion of Kuwait on August 2, 1990 which resulted in Kuwait oil production, which was set afire by the departing Iraqi Army, being off the market for many months. Most U.S. crude oil exports during this time were to Canada as the export restriction was in place.
  • In the period directly following these Middle East events, 1993 to 1997, crude oil was “exported” to the U.S. Virgin Islands to supply the Hess refinery located at St. Croix; probably with Alaskan North Slope. The quantity of the crude oil exported averaged 87,000 barrels a day.1
  • In 1996 exports of Alaskan North Slope Crude Oil were authorized with certain requirements to utilize American bottoms and follow other restrictions. For the next nine years sporadic deliveries were made primarily to Japan and Korea. During this 9 year period, 2.7% of the Alaskan North Slope crude oil production was exported or an average of 28,300 barrels daily.2 Exports of Alaskan North Slope to Asia also occurred again in 2014 with two cargos moving and another cargo during 2015.
  • The latest surge in U.S. exports of crude oil is a result of a technological innovation that enhances oil and gas recovery from shale formations – hydraulic fracturing. Exports of domestic crude oil began in earnest in early 2013 and continued both before and after the repeal of the crude oil export ban in December 2015. During the export ban, the primary destination was Canada (293,000 barrels a day).

The export restrictions related to U.S. produced crude oil were repealed in December 2015 by the Consolidated Appropriations Act, 2016 and U.S. produced crude oil is now traded freely in the worldwide oil market. During this short time that unfettered exports have been permitted, the dominant destination is again Canada with refineries located in the Maritime Provinces as the prime customers receiving waterborne shipments of U.S. crude oil. From the repeal date through April 2016, 15 countries have received exported domestic crude oil that totals 445,000 barrels a day. The major recipients, in addition to dominant recipient, Canada (307,000 barrels a day), include smaller shipments to Curacao (blending), Netherlands (petrochemical manufacture), and Italy (refinery input).

Given the governmental restrictions in place from 1975 through the end of 2015 and excluding the special dispensations for the Virgin Islands and for movements of Alaskan crude oil, the destination of exported crude oil was primarily Canada, which was transported by pipeline crossing the border at various connections throughout the Great Lakes area and along the northern border in Montana and Washington or by tanker delivered into the Maritime Provinces.

Implications for Shipping
The ability to again export domestic crude oil offers tanker owners the opportunity to now load outbound cargos at the same or a nearby port from which an inbound cargo of imported crude oil was just discharged. These opportunities can arise at the major oil ports of Corpus Christi, Houston, Texas City, Port Arthur, and New Orleans on the Gulf Coast and Los Angeles on the West Coast. From an industry viewpoint, such an opportunity improves both operational efficiency and company profitability.

Since the ending of restrictions in December 2015, crude oil exports and averaged about 500,000 barrels a day, or about the equivalent of one export tanker every day and early indications suggest the primary crude oil export ports are Houston and Corpus Christi. As the ability to export U.S. produced crude oil takes its place in the world market, a consistent pattern will emerge and will be based on the worldwide balance of supply vs. demand for crude oil. A key indicator as to the balance between supply and demand is manifest by the price; especially the price relationships among commodities of the same type.

In the world of crude oils, the best price indicator for U.S. crude oil is the price of West Texas Intermediate (WTI) crude oil. Similarly, the best price indicator for foreign crude oils is the price of Brent Crude Oil, which is produced in the North Sea. Both crude oils are blends of crude oils produced from various fields generally located in the same or similar oil producing basins. For example, Brent Crude Oil is a blend of oils produced from the Brent, Forties, Oseberg, and Ekofisk oil producing formations. Similarly, WTI is a blend of similar quality oils produced in West Texas from the Permian Basin area as well as similar quality oils from oil producing basins located in Kansas, Oklahoma, and New Mexico. The basic crude oil quality parameters are displayed by Table 1.

Indications of Opportunity
A primary indication for an opportunity to engage in re-loading crude oil after discharging a cargo of imported crude oil at major oil ports in the U.S. can be achieved by monitoring the price difference between West Texas Intermediate (WTI) and Brent Crude Oils. See Figure 3

figure-3
What are the waterborne price indications that would suggest shipping opportunities since exports of U.S. produced crude oil are now permitted?
If WTI is over Brent (positive difference), i.e., WTI/Brent > $2.00/Bbl – then low sulphur high gravity foreign crude oils flow into the U.S. (see “IMPORTS” in graph above)
If WTI is under Brent (negative difference), i.e., WTI/Brent > $2.00/Bbl – then U.S. crude oil flows to countries in both Europe and the Mediterranean (see “EXPORTS” in graph above)

If the price difference is between -$2.00/Bbl < WTI/Brent > $2.00/Bbl, this represents a null point resulting in essentially no cross Atlantic trade; WTI stays in Western Hemisphere – Brent stays in Eastern Hemisphere

The price difference of $2.00 a barrel is the estimated average full cost for transporting crude oil within the Atlantic Basin. This would include the market freight for chartering or operating an oil tanker on a voyage basis, cargo loss, import duties and taxes, as well as a provision for catastrophic insurance. Adjustments to this suggested fixed differential should be made to reflect the current total cost of freight.

Conclusion
While trade restrictions regarding the export of U.S. produced crude oil were in effect (1975-2015), the U.S. was a one-way market as far as crude oil was concerned – imports only. Since the repeal of these export restrictions in December 2015, the market has now become a two-way market – imports and exports. This offers ship owners and operators an opportunity to increase both efficiency and profitability by having the capability to re-load a cargo of crude oil in the U.S. at either the same or at a very close neighboring port after discharging a cargo of imported crude oil. While the ability to export domestic crude oil is still a relatively new prospect, as various U.S. crude oils find their place in the world market, a consistent pattern will develop and offer ship owners the opportunity to become established in these new trading patterns.

Monitoring commodity price differentials can offer insight as to what freight opportunities might be available.

1 Energy Information Administration – Oil Exports
2 “Understanding the Export of Alaska North Slope Crude,” ANWR.org, November 23, 2014.

  • Date September 13, 2016
  • Tags September 2016