Have Another Swap of Mexican Crude - Will A New Route Open for U.S. Crude Exports?

In April officials from Mexican national oil company PEMEX expressed confidence that their January 2015 application to the Department of Commerce, Bureau of Industry and Security (BIS) for a license to export U.S. crude under a swap arrangement will soon be approved. The swap would involve Mexico importing U.S. light crude and U.S. refiners buying an equivalent volume of Mexican heavy crude. The transaction would bypass decades old U.S. crude oil export restrictions and indicate a further loosening of the rules after moves to allow condensate exports last summer. In today’s blog “Have Another Swap of Mexican Crude - Will A New Route Open for U.S. Crude Exports?” Sandy Fielden examines the proposed exchange.

Back in 1998 the U.S. Strategic Petroleum Reserve (SPR – see Save it For A Rainy Day) exchanged 11 MMBbl of heavy Maya crude originally purchased from Mexico in the 1980’s for 8.5 MMBbl of lighter Olmeca and Isthmus crude (also purchased from Mexico) in order to meet SPR quality requirements. That crude swap with Mexico occurred at a time when more U.S. refineries were configured to process light crudes and the government wanted to replace SPR heavy crude inventories with lighter oil. Fast forward to 2015 and now the tables are turned. In January PEMEX revealed it has applied for a license to facilitate a crude swap with the U.S. This time around PEMEX wants to exchange 100 Mb/d of their heavy Maya crude with lighter crude now being produced in spades in U.S. shale basins.

The Mexican swap did not involve the SPR this time but rather the BIS. 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 led to a surge in exports of processed condensate from the Gulf Coast since 2014 (see What Condition My Condensate Was In). Another exception in the legislation governing crude exports (the Energy Policy and Conservation Act - EPCA) is for crude exported as part of a swap for equivalent crude or refined products into the U.S. That is the exception PEMEX seeks to use to export U.S. crude. 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.