Analysis - Alaska crude likely first to flow around U.S. export ban

WASHINGTON Tue Feb 11, 2014 5:02am GMT

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WASHINGTON (Reuters) - Oil traders looking for cracks in a contentious decades-old U.S. ban on crude exports should be looking west, not east.

The first big cargoes to be shipped far overseas are likely to come from one of the country's oldest oil patches, Alaska, rather than booming new shale fields like the Eagle Ford of Texas, or North Dakota's Bakken.

Oil companies and analysts are already examining the widening arbitrage window for selling Alaska's North Slope (ANS) crude to Asia, looking to resume shipments that halted a decade ago as rising domestic output of light, sweet crude threatens to crowd long-time baseload ANS out of West Coast refineries.

The shift may occur even sooner than expected after news last week that Flint Hills Resources FHR.UL will shut down its 85,000 barrels per day (bpd) North Pole refinery near Fairbanks, which had consumed nearly one-sixth of ANS output.

Such sales are essentially unrestricted, thanks to an exception to the export ban carved out by President Bill Clinton in 1996, when ANS output was near its peak. However, experts say the logistics are complicated, with strict shipping requirements that may thwart some efforts.

Alaska crude is one of the several areas "within the margins of the current export ban," said Amrita Sen, chief oil analyst for research consultancy Energy Aspects.

As much as 30,000 to 50,000 bpd of ANS may be exported by year-end as pressure on domestic light, sweet crude prices builds up, making it more economic to sell abroad, she said. Ed Morse, head of commodity research at Citi, told a conference in Washington on Monday that up to 100,000 bpd may be exported.

The sales, if they resume, could give ammunition to lawmakers in Washington seeking to revise the 40-year ban on crude oil exports. Alaska Senator Lisa Murkowski is one of those campaigning for changes.

Last week, Reuters reported that U.S. authorities had approved limited re-exports of crude to some European countries for the first time in years.

Executives from Conoco Phillips (COP.N), the largest producer of oil and gas in Alaska, said last November they were open to the possibility of exporting North Slope crude to Asia although had no immediate plans to pursue it.

They said the option could be viable if North Slope oil traded $5 a barrel below European benchmark Brent crude. The price briefly fell to as much as $8.50 below Brent in November, one of the deepest discounts on record, according to Reuters data going back to 1988. It has rebounded to around $3 below. On average, it has traded about $1 below since 2008.

"Our view on the matter hasn't changed," Daren Beaudo, director of media relations told Reuters last week.

BP (BP.L) is "working to determine the business implications of a change in the current barriers to oil exports" on a national level, spokeswoman Dawn Patience said.

Exxon Mobil (XOM.N) declined to comment on Alaska exports, but was among the first oil majors to raise concerns about "artificial barriers to trade."

Both oil majors are involved in Alaskan crude production.

CROWDING OUT ALASKA

President Bill Clinton signed legislation in 1996 that ended a 23-year-old ban against exporting ANS crude. Oil production in Alaska had swelled from almost nothing to more than 2 million bpd over the decade to 1988, overwhelming demand.

Within five years, Alaska exports to Asian countries ran at around 44,000 bpd, Energy Information Administration (EIA) data show. But exports to Asia ceased in 2004, after ANS production began to decline and the surplus dwindled. Alaskan output totalled 526,000 bpd last year, the lowest in 25 years.

Now, West Coast refineries that process ANS crude are filling their slates with more inland crude.

Rail deliveries to California plants reached a record 34,000 barrels per day (bpd) in December, up 20-fold from a year earlier, according to the California Energy Commission. Two-thirds of the crude came from Canada.

In 2012, Tesoro replaced ANS for Bakken crude at its 120,000 bpd Washington state refinery, and is working on a $100 million rail-to-barge terminal that would help supply Bakken and Canadian crude to the West Coast.

Total rail unloading capacity is set to reach 910,000 bpd, surpassing the 810,000 bpd of potentially "substitutable" waterborne imports and Alaskan crude, Keith Casey, senior vice president of strategy and business development for Tesoro, said at the company's annual meeting in December.

TANKER TRACKER

The challenge with exporting ANS is related to shipping rules, not export bans, experts and analysts said.

Exporters of ANS crude must obey the 1920 Jones Act, a law requiring all vessels moving cargo between U.S. ports to meet a host of requirements, including that they be U.S.-built, -flagged and staffed mainly by U.S. crews.

Clinton's 1996 order requires ANS exporters to keep their tankers 200 nautical miles outside of the United States and equip them with systems that allow the U.S. Coast Guard to track their locations.

Currently, there are 49 U.S.-flagged tankers, and five are not Jones Act-eligible, U.S. government statistics show. Rates for all those tankers have surged on rising demand to ship Texas shale oil to the East Coast.

"To make ANS exports economic today, companies do not have to overcome the politics of crude exports but must account for the constraints of the Jones Act," said Jacob Dweck, a lawyer representing energy companies for law firm Sutherland Asbill & Brennan.

REVIVED PRODUCTION

Other factors are adding to pressure for ANS exports.

For one, the closure of the North Slope refinery is set to reduce demand for crude within the state, likely adding downward pressure on prices. The differential for cash ANS crude has fallen by more than $2 since the announcement.

Alaskan crude output may also be set to grow again after a 25-year decline. Since a state tax repeal on producers took effect in January, oil companies have begun committing to new rigs, wells and jobs in the North Slope, says Kara Moriarty, president of the Alaska Oil and Gas Association.

She said exports may come into focus as Alaska catches up to other oil-producing regions in the lower 48 states.

"Everyone has increased production except for us," she said.

(Additional reporting by Anna Louie Sussman; Editing by Jonathan Leff and Eric Walsh)

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