The recent ruling by the Commerce Department, allowing Pioneer Natural Resources (PXD) and Enterprise Product Partners (EPD) to export light ‘condensates’ puts an effective end to the export ban. It will have multiple effects on both the exploration and production companies working in the Permian, Eagle Ford and Bakken shale plays as well as domestic refiners. But even more importantly, it represents another stupid US energy policy decision that is blind to long-term US energy needs that does nothing except increase the profits of a few domestic E+P players.
Many analysts have discounted this decision to allow very marginally distilled crude oil to be considered a ‘refined’ product and allow its export. But this is a giant crack opening up in an export ban that has been in place since the 1970’s keeping domestic crude at home. Pioneer CEO Sheffield has been lobbying for an end to the ban as has Harold Hamm of Continental Resources (CLR) and now they have the workaround they need to avoid a Congressional battle. The Commerce Department will soon be flooded with similar requests for condensate workarounds from Continental, Cimarex (XEC), EOG Resources (EOG) and several other lesser players, all of whom will be able to recapture the margin discount between domestic and global crude and the current discounts on Permian and Bakken oil.
Refiners in the Gulf coast like Valero (VLO) got pummeled yesterday and that’s no fluke. The margin advantage that they’ve enjoyed to mint money over the last 3 years is about to disappear and I wouldn’t own any refining stock right now, until the market gets a better sense of just how deep this export workaround will go.
I’m betting that a new oil business will emerge from this Commerce department ruling and crude ‘distillation’ units will start popping up near the hot shale plays. This is, I believe, Enterprise’s focus in appearing as part of this latest dispensation for export – processing and transport companies will benefit from the coming end of the export ban. I can see 2 million barrels a day of ‘condensate’ being exported in the next two years.
Opponents to end the export ban claimed that free export of domestic crude would lead to higher gasoline prices, but that’s just a canard. Gas prices have been tethered financially to global prices of crude and refiners will not be able to pass along their margin discount to drivers at the pumps. That’s the good news.
US shale players in very light crude producing areas have been given a green light to ramp up already frantic production -- and they will, capturing a global price that is at an $8 a barrel premium, and that’s not even counting a further local negative differential. If you were a long-haul holder of these stocks, this is the catalyst you’ve been waiting on for the next big leg up in share prices. That could be seen as good news, if you’re a shareholder.
But the really bad news is that the floodgates have been opened in the already breakneck pace of emptying our domestic natural resource of crude oil from shale for the benefit of only a few shareholders and E+P CEO’s. We will gain nothing in energy independence, little if anything in lower energy prices and very limited economic benefit in jobs and growth. In 5 years, when the Bakken and Permian plays are quickly eroding on their way to being spent, we’ll wonder why we chose to send overseas a domestic resource that could have lasted a generation or more powering US businesses and again become a dependent consumer of overseas oil supplies.