Oil Export Ban Is Hurting Your Royalty Checks!

by Kenneth E. DuBose on December 12, 2013

The Oil export ban is in the news more this year than we have seen in decades.

The main reason is production has increased 60% or 3 million b/d in the U.S. since 2008. The U.S. is producing more oil today (almost 8 million b/d) than we have as a nation in more than 25 years.

The thorn on the rose is the oil export ban. On the surface, it doesn’t sound bad.

We consume more than we produce, so why would we export oil.

As most issues are, it’s more complicated than many in the media make it out to be.

Refineries in the U.S. spent years preparing and upgrading to handle cheap, heavy crude oil from places like Canada and Venezuela. The oil being produced in the Bakken, Eagle Ford, and in West Texas is predominantly light crude.

We have refineries that are configured to handle heavy crude and we’re feeding them light crude. It’s not efficient and it flat out doesn’t work in many cases. That’s why WTI (the U.S. benchmark) has traded approximately $10-20 cheaper than Brent (International benchmark) throughout 2013.

The efficient way for the market to react is to import cheaper heavy crude and sell light crude at a premium on the international market. Instead, we’re seeing suppressed prices. WTI has traditionally traded at a premium to Brent and is now trading at a significant discount.

The area hit the hardest might be the Bakken where oil is trading at a ~$20 discount to WTI and a ~$30 discount to Brent prices.

Canadians Benefit From the Oil Export Ban

One side effect of the current policy is exports to Canada are increasing. We have a free trade agreement with Canada, so companies can seek an export exemption and move crude north. The result is Canadian refineries on the east coast are importing cheap U.S. oil from plays like the Bakken and Eagle Ford and exporting their own light oil………Let me say it another way. Companies in Canada are importing oil from the U.S. and selling the oil they produce at home and making a profit. The export ban makes it profitable.

So ask yourself, who does this affect the most? The oil market is one of the most liquid and free moving markets in the world, but we don’t export crude. The bottom line is a ban on oil exports is a deduction straight from the bottom line of your royalty checks.

If the current oil boom in the shale plays continues, your royalties will remain artificially low until the export ban is lifted.

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