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The U.S. Department of Commerce set off some alarms—or cheers, depending on your perspective—in the energy industry when it published a set of new oil products export guidelines over the holidays.

 

Some outside observers shrugged and said the new rules didn’t really change anything. A few others, however, are insisting the move was something important: a “wink and a nod” by the White House to more exports, or even an invitation to Congress to end the ban on exports of American crude oil products.

 

So what was it, really?

 

You’ve undoubtedly noticed that crude oil prices in the U.S. are plummeting thanks largely to the energy industry’s embrace of shale oil exploration and the resulting gusher of new supply. Federal law prohibits producers here from exporting crude, so the glut has produced some nice benefits for U.S. consumers, most notably in the form of super-low gasoline prices at the pump.

 

With so much oil around, the topic of ending the restrictions on crude exports has been hot for the last year and will be a big item on the new Congress’s agenda in 2015. But it hasn’t been clear what the White House’s stance is on the topic.

 

There are all kinds of political, geopolitical, and business pressures in favor of letting the U.S. share its oil production boom with the world. And in fact, it has already been happening. The U.S. has been a major net exporter of petroleum products, to the tune of about two million barrels a day, since 2010. President Barack Obama has touted that in speeches, but he hasn’t said he’d be willing to end the ban on crude oil exports.

 

Given the ban, you ask, how did the U.S. get to be a net exporter of oil? Well, federal law only prohibits the export of crude itself and not “refined products distilled from domestic crude” or crude that has been “processed through a crude oil distillation tower.” All of this is set out in an arcane set of federal regulations housed in a mysterious office at Commerce called theBureau of Industry & Security (BIS).

 

The rule seems simple enough, right? Wrong. What had been a relatively moot set of regulations when the U.S. was a net importer of oil has now become a full employment act for lawyers. In true Aristotelian fashion, there are legions of well-paid people who spend time answering the question: How much processing counts as “processing” under the rules? Surely, converting crude oil to diesel counted. But could something as simple as, say, filtering the crude count?

 

Companies started flocking to the BIS for individualized rulings that whatever they were doing was enough processing to be processing. Why did exporters need confirmation of what was already legal, you ask? They didn’t, really. They could legally “self-classify” their product as “processed.” But exporters, courter-parties, and banks (and all their various lawyers) were leery of signing on to export deals nonetheless. To those risk-averse parties, exports without the stamp of approval by Commerce was “driving blind”—even though it really isn’t. Hence the demand for the government’s blessings (what lawyers call “belt and suspenders”).

 

A few players started looking for cover. Companies like Pioneer Natural Resources and Enterprise Products Partners obtained such blanket “commodity classification” rulings by the BIS that their exports passed legal muster. Those rulings attracted a ton of unexpected political and media attention, even though the BIS rulings hadn’t really broken new ground at all.

 

It was all enough to make even Aristotle’s head spin. So last summer, Commerce basically turtled up and closed shop on private rulings. Some reports said that move amounted to a “wink and a nod”—there’s a startling amount of that in government—to encourage more producers to self-classify products as processed without any need for any blessing from Commerce. BHP Billiton became the first last year to export without explicit permission from Commerce—running without belt or suspenders, if you will.

 

I think BHP got it right. Commerce’s move to close shop on private rulings really was intended to encourage nervous exporters that they were not at risk by self-classifying. And I think the industry was ready to export much more minimally-processed crude this year.

 

Then in comes Commerce, captained by Forbes 400 member Penny Pritzker, again to muddy the waters on December 30. The department published a new set of answers to frequently asked questions on how much processing counts as “processing.” The guidance talked about six major factors, including things like whether “the distillation process materially transforms the crude oil by using heat (not just negative pressure)” and “change in percentage of different types of hydrocarbons between the input and output of the process.” (For any lawyers out there, look at the bottom of this story for the full text of the six factors.)

 

What did it mean?

 

Matthew Thomas, a Washington international trade lawyer here at Blank Rome who advises global energy and commodities companies, tells me that the test “seems vague, complex, and highly subjective, since it requires Commerce to consider the technical details of the ‘distillation tower’ equipment, the characteristics of the output streams, and the end use of the products. At first glance, the test seems surprisingly restrictive, although it will remain to be seen how it is applied in practice.”

 

An industry insider tells me that these FAQs send the message to potential exporters that the BIS intends to keep the waters muddied over what constitutes crude oil and distillation, and therefore it is probably portends more exports.

 

For good measure, I ran all this past a constitutional scholar friend. He said to me, rhetorically and with a bit of sarcasm: “Has this Administration taken executive power to ‘royal levels’ by going from the controversial making of law via executive order to now making it by FAQs quietly posted on the web?”

 

The bottom line is that all of these machinations last year, and especially in the year-end law by FAQs, will likely increase processed crude exports by nudging exporters to be more comfortable with self-classification. But the past year’s soap opera on this will also have the therapeutic effect of putting the question of whether we should or shouldn’t scrap the crude export ban law altogether into even sharper focus than it is already. And my constitutional scholar friend will take heart in the fact that the discussion will likely take place in Congress where the light of day can shine on it.

 

As promised, here’s the list of six factors that the Commerce department says determines how much processing counts as “processing” in the crude oil game:

 

– whether the distillation process materially transforms the crude oil by using heat (not just negative pressure) to induce evaporation and condensation, into liquid streams that are chemically distinct from the crude oil input;

– the change in API gravity between the input of the process and the output of the process;

– the change in percentage of different types of hydrocarbons between the input and output of the process;

– whether the streams resulting from distillation have purposes other than allowing the product to be classified as exportable petroleum products, such as use as petrochemical feedstock, diluent, and gasoline blendstock;

– whether the distillation process utilizes temperature gradients and has significant internal structures, such as trays or packing, and differentiated output streams;

– whether the distillation uses towers with more mechanical complexity and heat, higher residence time, internal structures that promote condensation and better separation, and a consistent quality liquid streams (also called cuts or fractions) than equipment used to separate vapors and liquids for transportation needs.

 

Is your head spinning? Even faster now, I’m sure.

 

 

Source: Forbes