Published August 26, 2014
Lifting the ban on oil exports would serve as a credit boost for much of the industry, according to a new report from Standard & Poor’s.
The U.S. has prohibited exports of raw oil for nearly four decades. Domestic energy production has changed drastically in recent years, with shale oil lifting U.S. output. As of July, crude oil production checked in at 8.5 million barrels per day, the best since 1986 and up from five million bbl/d in 2008.
In May, Energy Secretary Ernest Moniz indicated the ban could be nearing an end, saying the department had begun evaluating the issue.
The news set up a policy battle that pits oil producers against refiners, which could stand to lose their pricing advantage from domestic oil. However, the credit impact on refiners will likely be muted given current strength in the industry, S&P explained.
“Clearly, the losers would be the refining industry. But with current ratings on refiners, there’s a lot of cushion. It would take a prolonged downturn to affect ratings,” said Michael Grande, a credit analyst at S&P and one of the report’s authors.
For refiners, the shale oil boom has turned their prospects around by giving them access to cheaper crude. Refineries have been able to export diesel and other products at better margins.
But because of the system’s structure, refineries are only able to handle a limited amount of light crude shipped from North Dakota’s Bakken and other shale plays. Years ago when U.S. oil production was on the decline, refineries were configured to handle a heavier type of crude oil from Saudi Arabia and other countries.
An end to the export ban would benefit energy firms involved in exploration and production, as well as oilfield services companies and midstream companies like pipeline operators. In its report, S&P projected increased profitability for exploration and production companies if a full or partial lifting of the ban takes place.
“Whether higher profitability leads to stronger credit measures and ratings would then depend on how quickly, and by how much, [exploration and production] companies ramped up drilling to take advantage of the higher price realizations,” the S&P analysts wrote.
Grande said the price difference between West Texas Intermediate and Brent crude, the international benchmark that trades at a premium to WTI, should narrow if exports begin. In arguing for oil exports, producers are likely saying they will be incentivized to drill more, he added.
S&P expects that if domestic oil production continues to climb and refineries maintain their choice of crudes, the U.S. will likely have a glut of light, sweet crude “within the next few years.” Without oil exports, a glut in domestic oil supplies would then push prices even lower, straining the economics of oil drilling.
Aside from oil exports getting a green light, alternative options to alleviate a potential glut include expanding exports of condensate or having refineries take on more light crude, S&P noted. The U.S. recently eased oil export restrictions by permitting shipments of condensate, an ultralight form of oil.
Fueling the debate over completely removing the oil export ban is the potential impact on gasoline prices, although the price at the pump could actually decline. According to IHS, domestic gasoline prices would fall about eight cents a gallon since the introduction of U.S. oil to the global market would lower the cost of fuel.
Grande explained that refined products like gasoline would reflect lower prices for Brent crude.
“Our thought is that if exports were allowed, gas prices could go down, not up,” he said.