The U.S. government has authorized limited crude oil exports to Europe for the first time in years, raising new questions about how companies are testing the limits of a controversial, decades-old exports ban.
The Commerce Department has granted two licenses to export U.S. crude to the U.K. since last year and another two to Italy, according to data Reuters obtained through a Freedom of Information Act request.
One application for German exports was filed in January and is awaiting a decision by the Bureau of Industry and Security (BIS), which is responsible for reviewing requests to export crude under a 1975 law that bans most shipments with a few exceptions, including sales to Canada and re-export of foreign oil.
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These are the first permits for shipments to Britain since at least 2000 and the first to any European country since 2008, according to data from the BIS. The bureau has approved 120 licenses since January 2013, nearly 90 percent of which were for sales to Canada, the data show.
It was not immediately clear under which provisions BIS granted the European export licenses. The current regulation allows foreign crude to be re-exported from the United States if it is not commingled with U.S. crude, an option that some Canadian producers are said to be using.
In rare cases, the regulation permits the exchange of U.S. oil for foreign crude or refined products of higher value, which has become an attractive option with the growing surplus of light, sweet shale oil.
Whatever the case, the licenses could add to the growing debate in Washington on the benefits and pitfalls of lifting the ban, among the year's most urgent energy policy questions, as the relentless rise in shale oil production threatens to saturate domestic refiners as soon as this year.
They may add to expectations that the Obama administration will allow companies to use provisions in the existing regulation to slowly increase exports, while stalling on a decision on whether to scrap the ban.
With U.S. oil production at a 25-year high, many oil producers are eyeing other markets and have called for an end to the ban on exports, which they consider a relic of the 1970s, when the Arab oil embargo led to steep prices at the pump.
Alaskan Republican Lisa Murkowski, the Senate Energy and Natural Resource Committee's top Republican, has backed that position.
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On the other side, independent U.S. refiners, which stand to benefit from cheaper domestic crude, have argued against easing restrictions.
Sen. Ron Wyden, chairman of the Energy and Natural Resources Committee and an Oregon Democrat, warned at a hearing last week that "a number of influential voices" that want to export oil could drown out the risks for the average consumer.
If more exports to Europe are allowed, refiners across the Atlantic may have cause to celebrate since access to cheap, high-quality U.S. shale oil would help revive their margins.
The BIS did not respond to frequent requests for information on the nature of the licenses. It declined to comment on the identity of the exporting companies, citing exceptions in the Export Administration Act.
The bureau's data do not show which permits were used, and the Energy Department's oil export data do not show any crude shipments to Europe through November 2013.
European exports a rarity
Exports of crude to Canada were initially approved by President Ronald Reagan in the 1980s, and have picked up rapidly in recent years. The United States sent about 200,000 barrels of oil a day to Canada in November, the highest volume since 1999, data from the Department of Energy shows.
A handful of licenses have also been regularly approved over the past decade for countries in Central America or Asia, either for the export of heavy California crude or the re-export of foreign-origin oil, according to a BIS statement released last year.
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But European countries have rarely appeared on the list. Two permit applications filed in 2011 for exports to Switzerland and one for exports to the Netherlands were not approved.
The two approved U.K. permits were for shipments with a total maximum value of $1.8 billion, while those to Italy were valued at $3.12 billion. The application for German exports was worth $2.6 billion, the data show.
Theodore Kassinger, a partner with the law firm O'Melveny and Myers in Washington who previously served as the deputy secretary and general counsel of the Department of Commerce, said the bureau likely stuck to existing provisions to allow exports to Europe.
"The licenses were likely within the confines of the current law and so they may have involved re-exports of foreign-origin oil," he said.
Without established trade routes or tanker rates, it is difficult to compare the economics of exporting Canadian heavy oil sands versus shipments of U.S. light-sweet oil to Europe. Few traders have examined the value of such unprecedented shipments.
While Canadian crude trades at deep discounts to the U.S. benchmark futures contract, most European refiners are not configured to process the heavy oil.
Ultra light, low-sulfur Bakken, on the other hand, would be welcome in Europe, but trades at relatively higher prices in the United States where local refiners are still eager to replace imported crude with the domestic grade.
Export expansion suggests oil swaps
Others said oil volume swaps—whereby companies can export U.S. light oil for a higher quality or volume of crude or refined fuels—may be behind the recent expansion in export licenses to Europe.
"The implication is that we are not exchanging a higher value item for a lower value," said Ed Morse, global head of commodity research at Citi, while noting that re-exports of Canadian heavy oil from U.S. shores are on the rise.
Applicants for such licenses have to demonstrate that the trade is part of an overall transaction in the nation's interest and the oil cannot be sold for a reasonable price in the United States.
Sellers also have to prove that exports will be terminated if U.S. supplies are seriously threatened.
"I am skeptical that it was a swap because tests for such exports are very complicated," Kassinger said, referring to sellers' onus to prove that they can't sell the oil at a profit within the country.
"But the time will not be very far when it will not be commercially viable to market the crude in the country," he said.