Have Another Swap of Mexican Crude - New Route Opens Up for U.S. Crude Exports

Last Friday (August 14, 2015) the Department of Commerce (DOC) revealed to the press that they would approve a handful of applications to export U.S. domestic light crude to Mexico under a Licensed “swap” arrangement that involves importing the same volume of heavy crude to the U.S. from Mexico. The Licenses are likely to be awarded to Mexican national oil company PEMEX or its affiliates and will last for a year starting at the end of this month (August 2015). Today we update our earlier analysis of Mexican crude swap exports.

Back in May we detailed the application made by PEMEX to the BIS in January 2015 for a license to export U.S. crude under such swap arrangements (see Have Another Swap of Mexican Crude). This blog is an update to that analysis. The swap request involves U.S. producers exporting light crude and U.S. refiners buying an equivalent volume of Mexican heavy crude. The approval of this transaction last Friday indicates a further loosening of U.S. crude export regulations after moves just over a year ago to allow lightly processed condensate exports. The PEMEX application (not necessarily the one approved) proposed to exchange 100 Mb/d of their heavy Maya crude with lighter crude now being produced in spades in U.S. shale basins. Recall from previous blogs on the topic that the BIS is the government agency in charge of controlling exports of regulated items  – including domestic crude oil (see CCATS Scratch Fever). Under arcane 1970’s era rules designed to protect strategic resources, exports of U.S. crude are banned except to Canada or in specific circumstances from Alaska and California. There are a number of other exceptions to the crude export ban including – as it turned out last June – lease condensate that has been processed through a distillation tower. That last exception has led to a surge in exports of processed condensate from the Gulf Coast since 2014 (see What Condition My Condensate Was In). The latest approval occurs under another exception in the legislation governing crude exports (the Energy Policy and Conservation Act - EPCA) – one for crude exported as part of a swap for equivalent crude or refined products into the U.S. According to the EPCA such swaps must be in the national interest and the exporter has to show compelling economic or technical reasons why the exported crude cannot be marketed in the U.S. No details yet on how that is handled by these approvals.

As we explained in CCATS Scratch Fever, the BIS is very secretive about it’s dealings on exports but press interviews given by PEMEX officials in January and April of this year (2015) indicate that the Mexican oil company requested a license to swap exports of light shale crude with imports of its own heavy crude to the U.S.   PEMEX wants to process the lighter imported crude at refineries in Salamanca, Tula and Salina Cruz – hoping to produce less residual fuel oil than they get from processing their own predominantly heavy crudes. The swap is in part designed to compliment Mexico’s current replacement of fuel oil fired power generators with natural gas plants (see No Need for Mexicali Blues) because of which they won’t need as much fuel oil in the future. PEMEX has reportedly negotiated with producers in the Eagle Ford, Permian and Bakken to buy light crude and presumably intends to exchange those light barrels with sales of their flagship heavy Maya crude to U.S. Gulf Coast refiners.