Watching Government: When condensate is product

July 28, 2014
It was easy to remember the Bad Old Days when the US had Old Oil, New Oil, and the Small Refiner Bias amid the kerfuffle after the US Department of Commerce's Bureau of Industry and Security (BIS) ruled in late June that condensate qualifies as an oil product for export purposes in some cases.

It was easy to remember the Bad Old Days when the US had Old Oil, New Oil, and the Small Refiner Bias amid the kerfuffle after the US Department of Commerce's Bureau of Industry and Security (BIS) ruled in late June that condensate qualifies as an oil product for export purposes in some cases.

The differentiation's value is obvious: US crude oil exports are heavily restricted. Oil product exports aren't. So while Congress argues over whether the nation's significantly improved crude oil production outlook means more exports should be allowed, many US refiners are shipping more of their products to foreign countries.

BIS operates under strict confidentiality, speakers noted at the US Energy Administration's recent conference. They said its crude oil definition was adopted from old oil price and allocation regulations, and the distinction apparently is based on whether the condensate has passed through a distillation tower.

Where might this upgraded condensate wind up? "There's a diluent market in South America where a lot of heavy crude is produced," said John R. Auers, executive vice-president at Turner Mason & Co. Consulting Engineers. "But I believe most of it would go to Asia for petrochemicals."

This all made David J. Bardin, who was a federal energy official during the Carter administration, remember the Small Refiner Bias and the problems it caused.

"The justification was that a number of small refineries, mostly in California, couldn't compete effectively for crude oil and potentially would be driven out of business," he told OGJ on July 21. "But it opened a loophole for people who'd never been in the refining business to bring crude in."

The provision was part of the 1973 Emergency Petroleum Allocation Act. Refineries with less than 175,000 b/d of processing capacity were granted extra entitlements that gave them lower marginal costs than larger plants, according to the University of Texas at Austin's Center for Energy Economics (CEE).

Actual result

It actually made smaller, less efficient refineries more profitable, and construction of these plants boomed. "Most of the new capacity was in the form of unsophisticated hydroskimming plants with less than 30,000 b/d of crude distillation capacity," CEE said in a case study.

"The mindset was to protect American consumers," Bardin said. "Politicians liked the idea, but controls actually had little effect on prices, which were determined on world markets."

BIS simply found an opportunity to increase US petroleum exports, he continued. "I think the US statutory restrictions for exporting crude oil are very questionable," Bardin said. "Strange, sometimes bad, results occur with good intentions. We try to protect consumers, but miss an opportunity to have a more efficient market."