MIDLAND, Texas—Takeaway is a continuing issue in light sweet crude provinces such as the Permian Basin. The “metaphorical pipeline” that could move U.S. light sweet crude into the global market has astounding possibilities both locally in Midland, Texas, as well as internationally. Those prospects were discussed on Nov. 11 by Tom Petrie, chairman of Petrie Partners LLC, at Hart Energy’s Executive Oil Conference.

Exports of crude oil from the U.S. are currently restricted, but with U.S. production at more than 8.2 MMbbl/d and rising, pressure to allow higher levels of imports is growing. Petrie examined the prospects for large volumes of U.S. crude flowing to different countries and how it might affect the world’s geopolitical landscape. Petrie’s main focus was where the country stands on exports and where it will likely stand one year from now.

“America’s transformed outlook is an interesting one,” Petrie said. What he calls his “peak concern about peak oil” was in about 2005. Reports from the Association for the Study of Peak Oil at that time conveyed there was an “inevitable, irreversible decline in global oil. I witnessed the three decades of decline we had at that point in the U.S.,” he said.

So what does America do with this changed outlook? Petrie noted a big issue is centers on whether America will pay the price for ignoring the reality of the Middle East situation. “That’s very much what we’re dealing with today. I think it’s one of the factors that caused the Saudis to behave [like they have] recently, which has precipitated this price retrenchment that we’ve been going through in the last month or two.”

‘Petroleum Flexibility’

“By virtue of the combination of CAFE [corporate average fuel economy] standards and some other efficiencies in our consumption, and much more importantly the growth in our production, we’re looking at a path to petroleum flexibility for that petroleum independence,” Petrie said. “We’re probably looking at something like a 30% reduction in our physical imports of oil overall and something on the order of 50% reduction in our over-the-water reports—a rather dramatic change.

“If you factor in some of the benefits of natural gas exports and maybe exports of oil, we’re at a premium for the light oil that might be exported. We’ve got tremendous benefits to the U.S. trade balance, to job creation here in the U.S. and North America for that matter, and really a transformed outlook.”

He also forecasted that the middle of the next decade will have an even greater reduction in that import dependence—not total elimination but a “tremendous” reduction.

“With the dynamics and the rate of build that we’ve had in the Eagle Ford and the Bakken and now here in the Permian Basin, I think it’s fair to say the future is occurring much more rapidly than I even envisioned [a year ago],” he said.

Oil export policy

The legal ban on oil exports was put in place in connection with the first oil-price spike of the Yom Kippur War of 1973, and since then that’s been the law of the land with just a few noteworthy exceptions, Petrie said.

“What we’re now seeing, under the leadership of Pioneer and some others in the Permian, is a de facto lifting of some of the export ban. There’s an exemption that’s developed known as the light distillation exemption, where in the case of condensate, if you lightly distill it, you can ship the product of that light distillation legally beyond the U.S. borders.”

The distilled condensate exemption has important but limited utility for absorbing new shale liquids, he said.

“Now we’re seeing initially that there was this notion of applying for every permit to export, and it seems to be giving way to a de facto acceptance where there may be self-affirmation by producers that they qualify under the exemption, and if they do and they’re willing to make those exports with that representation, it’ll be OK.”

In any case, there’s going to be a need for a much broader flexibility and ability to export crude oil, because this exemption has physical limits that are likely to be reached in the next year, Petrie continued. He said it may even be in the next six to nine months.

“As a result, the real issue that we’re looking at is a plan by producers to really push for a loosening in the overall law that will prevent exports of crude oil and not just exports of products made from crude oil.”

Leveling the playing field between crude oil and its constituent products is important, he said.

Another priority is putting America’s energy leverage to use, and “that is the interesting dimension here. Given the awkwardness of the relationship today between the president of the United States and Putin in Russia, there may be a case for this to fit into U.S.-Russia relations going forward.”

The U.S. oil export policy will most likely impact Russian/Middle East geopolitics.

Evolving Oil Market Dynamics

“With the development of the major sources of new light oil in the Bakken, Niobrara, Eagle Ford and Permian, there has been a real filling up of the capacity of the U.S. to refine those oils within our system,” Petrie said. “Going back more than a decade ago, because the mindset was that we were going to be looking at more and more import dependence of medium and heavy oil, we reconfigured the refining system. So the optimal load of that system has to involve some of those medium and even heavy oils in order to run those refineries most efficiently.”

The U.S. oil-refining configurations underscore the need for light U.S. oil exports balanced by imports of medium and heavier foreign crude oils.

“Today we’re almost ready to hit the wall,” Petrie said. Because of the distillate exemption, Eagle Ford oil is being lightly distilled and then coming out of the Gulf of Mexico and moving in North America to the Canadian markets. That is then displacing Nigerian oil back into the Atlantic basin, he said.

“Because of the displacement that’s already going on, we’re going to see movement of this soil into the Asian markets either directly or indirectly,” Petrie continued. “Either way it’s going to begin to interact with the power of triangles [Russia, China, India and Iran], which are really becoming very dominant in the Eastern Hemisphere.

“As a result of that, we’re looking at a set of conditions that are really right for a major policy decision that ought to be coming forth, I suspect, in the first half of this coming year by the administration. Congress is going to push for it. It’s ultimately the president’s decision, and I’m more than a little optimistic that this is one where there may be bipartisan buy-in on the merits of it. It’s clearly been demonstrated … in studies that this is job-creating. It’s clear already what kind of benefit it is having for U.S. balance and trade.”