House hearing 2014: Should the U.S. export oil and natural gas?

[Of course selling off our gas and oil is a crazy stupid idea as this excellent article Shale Euphoria: The Boom and Bust of Sub Prime Oil and Natural Gas explains.  Alice Friedemann ]

House 113–131. April 2, 2014. The Crude truth: evaluating U.S. Energy trade policy. House of Representatives. 67 pages.

Until recently, United States crude production had been on a steady decline. In 1970, domestic production peaked at 9.6 million barrels a day. By 2008, we were producing almost half. Only 5 million barrels were being pumped per day. Then America did what America does best, and innovated. New technologies of horizontal drilling and hydraulic fracturing ushered in an American energy revolution. Because of drilling in places like the Bakken and Eagle Ford, U.S. crude production has increased 56% since 2008. Some experts even believe that the United States will become the largest crude producer in the world by next year.

But not all is good news. The oil being found in these places is light sweet crude. Unfortunately, the majority of the refineries connected to the production sites are built to handle heavy sour crude. We need new refineries, new pipelines to be built to process the light crude but, of course, that will take years. In the meantime, we should sell our light crude abroad to those who want to buy it. That would bring billions of dollars and thousands of jobs into the economy of the United States. It is an obvious solution for a simple problem. Unfortunately, the Federal Government seems to be in the way again. In 1975, the Energy Policy and Conservation Act was passed, making it illegal to export United States crude. It was at the height of the Arab oil embargo. Congress wanted to insulate Americans from global price shocks and conserve domestic oil reserves. In reality, this ban achieved neither of those goals. The ban has not insulated United States consumers from the world market.

Domestic gasoline prices are largely set by the global crude price, not domestic price, since crude is a globally traded commodity. The United States still has to import about 46% of our crude. These imports face market uncertainty just like every other traded good. Lifting the ban is what would actually protect domestic consumers. U.S. crude on the world market decreases the market share of bad actors like Iran and unstable countries like Algeria.

For producers to want to drill they have to have a profit or make a profit. The crude export ban has driven the domestic price of crude so low that producers will not be able to make money off the drilling. If something isn’t done, economists predict the drilling will slow in the next 18 to 36 months. Perfectly good oil will sit in the ground because the government restrictions are in the way.

So domestic production companies are forced to cut back on drilling and they are going to also be forced to lay off American workers.

Brad Sherman, California. We have had several hearings on the export of natural gas both in the subcommittee and at the full committee. I believe this is the first to focus on the export of petroleum. These are dramatically different economic situations.

You can ship a barrel of oil most of the way around the world for maybe 1% of its value whereas natural gas, to liquefy, transport and then re-gasify you are talking about 40% of its value.

There are some bottlenecks because every barrel of oil produced in the United States with the exception of some on the Alaska North Slope and 25,000 barrels of heavy crude oil from California has to find its way to the U.S. market and so there could be problems of a short-term nature and you could see 1% wasted effort as we transport Alaskan crude to U.S. markets when it might be more efficient to transport Alaskan crude to Asian markets and import more from Africa or the Middle East. As we focus on the possibility of exports, I think a number of questions arise.

First, what it will do to jobs, particularly in the shipping industry. We now have a requirement that domestically shipped oil has to be shipped on U.S. flagged, U.S. crewed—that is to say U.S. staffed ships but not necessarily ships built in the United States. Do we want to go further and require that the ships be built here and how important is that for our national security to have the infrastructure of U.S. shipbuilding and a merchant marine? We also have to look at whether we can require U.S. ships be used for the export of oil to Asian markets. Another issue that comes up is the federal—is the possibility of free trade agreements. We already see that free trade agreements with regard to natural gas indicate that it is automatically considered in the national interest to allow exports of natural gas to countries that we have free trade agreements with. Will the same apply to petroleum? Will the same apply to the Trans Pacific Partnership currently under negotiation? And under those trade agreements will we be able to require U.S. flagged ships, ships with U.S. crews, and U.S. built ships? To me, the most important thing in allowing export is what will happen if there is a worldwide shortage or a market disruption. Why do we ban the export of U.S. crude? We did it in 1975 because we lived through 1973, and I think that we want to be in a situation where it is both legal and practical to require that U.S. crude be used only in the United States during a period that resembles 1973—when there is a shortage, a market disruption, a boycott or gas lines from some other source.

We can put that in law so it is legal and if the President declares a disruption of world petroleum markets but it also has to be practical. What will be the effect on our foreign relationships if in the middle of a worldwide shortage we stop oil tankers in the middle of the Pacific and require them to return to U.S. ports? What will be the practical effect of bringing that oil back, knowing that we will have built infrastructure on the idea that the U.S. will both export and import petroleum and now all of a sudden we are hoarding our own production for our own purposes? So I look forward to trying to resolve these problems because it is bad for our economy and bad for the environment to transport oil further than it would otherwise need to go or to mismatch produced oil with the refinery capacity, and I think it is in the interests of the environment not to have to transport oil further than it would otherwise have to go. Every ship is producing greenhouse gases.

Edward R. Royce, California, Chairman. I think you are holding a very important hearing at a very important time here as we start to think strategically about what it means in a world in which the United States increasingly has the capacity to ship oil to allies that are really under a great deal of pressure and how that could be used as part of our diplomatic efforts, for example, with Iran to maintain sanctions.

One of the things that I think should give us pause is that in our efforts to deny the regime in Tehran nuclear weapons capability the United States and our European allies levied devastating sanctions against Iran by doing one thing primarily in the original bill and that was targeting their ability to export oil and that severely limited their crude oil sales and denied them the ability to repatriate hard currency from those sales. Now, the sanctions against Iranian crude are often described as Iran’s Achilles heel, yet we are imposing the same kinds of sanctions on our own country since without a crude export relief valve oil companies will pull back on what will be increasingly uneconomic production. And the relief valve here is one that we could have used more effectively with respect to our allies because there were five of our allies that were still taking oil shipments from Iran. We could have supplied that differential. We could have brought additional pressure to bear, and should again this situation in Iran not be—not be solved in ensuing months or years, my hope is that we will have the capacity to think about what we could do in order to step in.

At the same time, the Russian annexation of the Crimean Peninsula was made easier by its energy grip over Eastern Europe and especially over Ukraine. Russia has large oil and gas reserves, not as large as ours. They don’t produce as much as we do but they do—but almost as much, and it accounts for 70% of their trade and 52% of the budget for Russia that goes to support their military and their government. The crisis in Crimea has done little to dampen Russian oil sales and Putin is freely selling oil and gas around the world and especially in Eastern Europe at monopoly prices and thus has unfortunately a tremendous amount of influence there. As we look at our strategies for the future, and I am going to quote General Martin Dempsey here, Chairman of the Joint Chiefs of Staff, he says, ‘‘As we look at our strategies for the future I think we have got to pay more and particular attention to energy as an instrument of national power, and I think that has to be factored in to the equation here. ‘‘If we increase our supply of oil, especially into Eastern Europe, we will dent Russia’s leverage on other countries and reduce the revenues that fund Russia’s aggression.’’

Lisa Murkowski, Alaska. In the Energy Committee we held a hearing on this issue several weeks ago. It was the first time in 25 years that there has been a hearing in the United States Senate on the issue of oil export. And put that into perspective. We haven’t had the opportunity to talk about it because we have been evaluating our energy portfolio truly from one of scarcity rather than one of abundance and how the landscape has changed. So this debate—this dialogue that you are beginning here in your committee is greatly appreciated and, again, very, very timely. Let there be no mistake that today’s issue—the ban on crude oil exports—is truly one in the national interest. In an area of doubt—of debt and deficits, the North American energy renaissance presents us with an opportunity to strengthen our position and resolve on the global stage while generating wealth, creating jobs, reducing our deficits and enhancing our national security.

Michael Jennings, CEO & President, Holly Frontier Corporation. We are a domestic independent refining company. We operate five petroleum refineries in the Central and Rocky Mountain states. We employ about 2,600 people directly and indirectly, a number that is probably 10 times that many associated with our contracted maintenance work. Our company is a merchant refining company. That means that we buy crude oil from those that produce it. We also have a wholesale marketing strategy so our products are distributed through convenience stores and big box retailers, none of which bear our name. But our products go out to a market that is in the center of the United States. We produce about 2.5% of the nation’s gasoline, diesel and related petroleum products through our plants each day.

As a merchant refiner, the key messages that I hope to convey to the committee today are as follows. Crude oil exports by the United States are likely to raise domestic crude prices and increase retail gasoline prices in the markets that our company serves by an estimated 10 to 15 cents per gallon of gasoline. Crude exports on the part of a country that imports nearly half of its crude oil requirements are, in our view, very unlikely to improve energy security or advance national interest as we will simply make ourselves more dependent upon crude oil imports as we export our own crude, and we need to be thoughtful about the nations from whom we would be importing that crude. Those with surplus are the OPEC producers and Russia.

The U.S. refining and petrochemical sector is a major employer and is making hundreds of billions of dollars of new investments over the next 10 years to increase manufacturing processing capacity along the Gulf Coast and in other places in order to manufacture and convert this wealth of new raw material that is being produced in the upstream.

We believe that this expanded production has helped in terms of our nation’s energy security. But though great strides have been made, the United States remains very dependent upon imported crude. This is not my opinion or the opinion of our company, simply a statement of the facts.

Current refining requirements are approximately 17 million barrels a day while domestic crude production was about 7.5 million barrels per day in 2013. That is projected to increase by a million barrels per day in 2014 but we are still importing at about 50% of our requirements. Supporters of lifting the ban on the crude exports argue that such a decision would make a move toward a freer global supply function, and certainly our company supports the development of freer energy markets. However, we have to be conscious of the fact that the global crude market is not occupied by free trade. It is dominated by OPEC, which is a cartel, and the country of Russia. Neither of these entities have free trade at their hearts. They are protecting their own domestic interests in cartel-setting volume requirements and other behavior.

I spoke earlier about the impact of pricing on U.S. gasoline in the face of potential crude oil exports, and our company’s view of that is there is probably a 10 to 20 cent per gallon uplift in the cost of gasoline, again, in the markets that we serve which would result from this policy decision. We take that by observing markets that are served by waterborne crude, principally New York Harbor, southern California and northwest Europe, and if we look at those gasoline prices wholesale pre-taxed against the prices that are traded in our markets supplied by domestic crude, we are seeing a 10 to 20 cent differential, with customers in Kansas, Oklahoma and Texas paying the lower number. We think that is something that the committee should take into consideration.

Government run national oil companies control approximately 85% of the world’s crude oil and 58% of production. In addition to these figures, and equally important to global prices, oil exports by the Organization for Petroleum Exporting Countries, or OPEC, constitute approximately 60% of the total petroleum traded internationally. EIA notes: “Due to the diverse situations and objectives of the governments of their countries, these national oil companies pursue a wide variety of objectives that are not necessarily market-oriented.” The level of control of the global crude oil market by national governments and a global cartel belies any claim that the market is free and open. With its market power, OPEC effectively influences crude oil production, supplies and pricing throughout the world through quotas and other controls. The facts make clear that OPEC controls supply to maintain prices where the member countries (including Iran, Iraq, Saudi Arabia and Venezuela) want them to be. OPEC is a cartel, and its existence is designed to control crude oil prices and preserve is members’ own domestic economies. Though American production has increased dramatically, it has not yet matured to the point at which it could significantly impact the price of crude in the global market.

The bottom line is that cheaper domestic crude means cheaper gasoline for consumers. This differential in pricing also means that consumers pay less for heating oil, propane and other critical petroleum products. As I have already stated, there exists a robust domestic demand for gasoline and other refined products in the region in which our company does business. 26 of the nation’s 139 refineries are located in the Midwestern and Plains states.

These plants process 3.7 million barrels per day of crude oil and produce 78 million gallons per day of gasoline and provide stable and high paying jobs for our workers. In this same region, gasoline demand is approximately 100 million gallons per day, a demand that is not readily shifted to other fuels or transportation sources given the predominantly rural and agricultural geography that comprises our market place. Exports could potentially raise costs and slow growth in an area of the country that is driving the American economy. In closing, we believe that any discussion of crude oil exports must be had in the broader context of developing a comprehensive 21st century energy policy for our nation. Though the expansion of production of crude oil in the United States has positively impacted consumers and our overall energy security, it does not tell the whole story. A meaningful discussion requires not only consideration of crude oil exports; but a consideration of the mandates created by the renewable fuel standard, completion of the Keystone XL pipeline and other infrastructure to support free flow of petroleum and products, a review of the EPA’s onerous Tier 3 gasoline rule, and a robust discussion on the future of domestic energy infrastructure. A holistic view is necessary in making decisions that will both shape energy policy, and help drive economic growth for decades to come.

A specific area of focus must be the renewable fuel standard. Insofar as our country has reached a point of security and independence in our crude supply to lift the export restrictions, it would be clear that we have no further need for the costly and inefficient crop-based fuel mandates created by the RFS to promote energy security. These bio-fuel mandates have and continue to drive up prices at the pump for American consumers and distort the price of refined petroleum products. Accordingly, I would encourage Congress to keep the RFS in mind as it debates issues associated with potential export of domestic crude.

Erik Milito, Upstream Director at the American Petroleum Institute. API has more than 580 member companies, which represent all sectors of America’s oil and natural gas industry. Our industry supports 9.2 million American jobs and 7.7% of the U.S. economy. The industry also provides most of the energy we need to power our economy and way of life and delivers more than $85 million a day in revenue to the federal government.

Today, America is producing nearly 50% more oil than we did in 2008. By 2015, International Energy Agency predicts the U.S. will surpass Saudi Arabia and Russia to be the world’s top crude oil producer. This is a new era for American energy, but our energy trade policies are stuck in the 1970s. The U.S. and China are the only major oil producers in the world that don’t export a significant amount of crude. It’s time to unlock the benefits of trade for U.S. consumers and further strengthen our position as a global energy superpower.

There also are strategic reasons to increase U.S. energy exports. As General Martin Dempsey, Chairman of the Joint Chiefs of Staff, recently said, “An energy independent and net exporter of energy as a nation has the potential to change the security environment around the world – notably in Europe and in the Middle East.” As we grow as an exporter, U.S. energy leadership has the potential to bolster America’s allies, expand our geopolitical influence, and our own self-imposed restrictions.

Kenneth B. Medlock III James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics, and Senior Director. Center for Energy Studies James A. Baker III Institute for Public Policy Rice University

During the past decade, innovative new techniques involving the use of horizontal drilling with hydraulic fracturing have resulted in the rapid growth in production of natural gas, crude oil and natural gas liquids from shale formations in the United States. This has transformed the North American gas market, generating ripple effects around the world and setting the stage for a period of global market transition. It has also contributed to the benchmark US domestic crude oil price West Texas Intermediate (WTI) becoming substantially discounted to global benchmark crudes. While this discount arose largely due to constraints on the ability to move crude oil away from Cushing, OK, it has triggered concerns that it is a harbinger of broader discounts of US crude oil prices relative to global market prices. Specifically, if a constraint on the ability to arbitrage a price differential drove the discount of WTl, then it stands to reason that a constraint on the ability to arbitrage US crude will more broadly emerge as the existing constraint banning US oil exports becomes binding. As a result, there has been significant interest in changing the long-standing laws banning oil exports.

Global crude oil demand is projected to increase to just short of 120 million barrels per day by 2040. The majority of the projected growth will come from developing Asian economies, particularly China and India, but also several other Asia-Pacific countries.

Importantly, demand in the countries of the Middle East is projected to grow among the fastest in the world, attributed to economic growth as well as heavily subsidized domestic energy prices. Of course, a lifting of subsidies would abate the projected growth, but absent a significant shift in domestic energy pricing policy, these countries will be challenged to maintain, much less grow, exports.

This signals a need for new sources of supply, and could move the geopolitical compass toward new supply growth areas, particularly those with abundant, accessible unconventional resources such as Canada and the US.

Of course, declining demand since 2008 has played a major part as well. This is particularly salient for petroleum product markets, as the US now exports (net) upwards of 3.5 million barrels per day of petroleum products, in fact, the combination of discounted crude oil, low cost natural gas, lower demand, and no policy-directed constraint on exporting refined products has allowed the U.S to effectively become a refining hub over the past few years, providing petroleum products to the global market place.

A Comment on Energy Security

The concept of energy security really began to take hold as a matter of national interest following the oil price shocks of the 1970s. In fact, every recession since World War II, except one, has been preceded by a run up in the price of oil. This strong correlation has prompted many policies aimed at mitigating the impacts of rising oil prices. As such, “energy security” generally refers to policies that aim to ensure adequate supplies of energy at a reasonable price in order to avoid the macroeconomic dislocations associated with energy price spikes or supply disruptions. So, how exactly do high oil prices negatively impact the economy? The literature on this matter is fairly deep, and there have been many proposed channels to convey the correlation, some of which carry a causal overtone.

… inflationary effects

  • Increases in the price of oil (energy) lead to inflation which lowers the quantity of real balances in an economy thereby reducing consumption of all goods and services.
  • Counter-inflationary monetary policy responses to the inflationary pressures generated by oil (energy) price increases result in a decline in investment and net exports, and consumption to a lesser extent.
  • trade balance effects Oil (energy) price increases result in income transfers from oil (energy) importing countries to oil (energy) exporting countries. This, in tum, causes rational agents in the oil (energy) importing countries to reduce consumption thereby depressing output.

… industrial influences If oil (energy) and capital are compliments in the production process, then oil (energy) price increases will induce a reduction in the utilization of capital as energy use is reduced. This, in turn, suppresses output.

If it is costly to shift specialized labor and capital between sectors, then oil (energy) price increases can decrease output by decreasing factor employment. If a recession is not unreasonably long, the high costs of training will cause specialized labor to wait until conditions improve rather than seek employment in another sector.

… and investment impacts In the face of high uncertainty about future price, which may arise when a price shift is unexpected, it is optimal for firms to postpone irreversible investment expenditures. Investments are irreversible when they are firm or industry specific.

Deborah Gordon Senior Associate, Energy and Climate Program Carnegie Endowment for International Peace. I began my career with Chevron as a chemical engineer and then spend over two decades researching transportation policy at Yale University, the Union of Concerned Scientists, and for a wide array of non-profit and private sector clients. I have authored books and many reports on transportation and oil policy making.

The U.S. is the major energy nation that is closest to being equal parts oil producer and oil consumer. Our energy situation stands in stark contrast to other nations. For example, China and Japan are majority consumers and Saudi Arabia and Russia are majority producers. America is in an enviable energy and economic position. We won’t want to either hoard or hand over all of our resources without first establishing policy goals and strategies. The challenge will be to determine what policy frameworks will balance the nation’s long-term oil trade objectives, national security, and global climate concerns.

Question #1: Given that the u.s. can already export unlimited volumes of petroleum products, under what conditions should if also be allowed to export crude? American crude generally cannot be exported, but there is no legal limit to exporting certain raw ultra-light oil components (natural gas liquids and condensates) and refined oil products. As of January 2014, product exports have increased 4-fold over the past eight years to 3.6 million barrel per day. Today’s oil trade is increasingly driven by valuable diesel, gasoline, jet fuel, and petrochemical feed stocks than crude oil. In 2013, the U.S. exported at least $150 billion in petroleum products, scoring the largest gain for any commodity in the U.S. economy.

A go-slow policy, will allow other nations to adjust to North America’s increased oil capacity. Those oil-rich nations that have built their economies on oil revenue are increasingly vulnerable to disruption. While reversing the export ban could increase global energy competition, it is also likely to change market dynamics and redirect refined product trade flows. It is unclear how the oil value chain will adjust in response to changes in upstream production and downstream refining factors. U.S. oil export policies must take these dynamics into consideration. Fostering market stability should be a primary consideration in deciding what conditions should apply to the U.S. in terms of future crude and petroleum product exports.

Question #2: Who would benefit most from reversing the U.S. oil export ban? Answering this question is not straightforward. It is unclear where exactly American light tight oil (LTO) fits into today’s oil value chain. Fracking in the U.S. is producing a different type of oil than Canada and increasingly OPEC are producing. And not all LTO, arc alike. Despite their generally high quality (light and sweet), U.S. LTO gravity ranges widely from 30 to over 70 degrees API-a huge spread. The Lightest of these oils are more like natural gas than conventional oil. Many U.S. and overseas refineries, have been retrofitted to handle heavy, sour oils, and cannot be fed a steady diet of LTO. In order to process Eagle Ford and Bakken oils, significant volumes of heavy oil must be imported and blended into LTO feedstocks. Depending on their quality, some LTOs may be better suited to petrochemical manufacturing.

Determining who benefits from exporting LTO is not simple. Oil producers (IOCs and independents), refiners, manufacturers, and the public each have different objectives that relate back to price spreads and uncertainty, and may not align with U.S. policymaker’s goals.

Figure 3: Price History for Selected Crude Types Oil producers and LTO leaseholders strongly advocate lifting the export ban. These stakeholders are responding to the potential for domestic LTO saturation in the Gulf Coast, widening price differentials between WTIILLS and Brent benchmarks, and an overly-simplistic view that easing the export ban would facilitate selling off more of the crude at a higher price from the Bakken, Eagle Ford, and o!her LTO oilfields. Industry analysts like Woodmac argue, however, that elude markets are complicated with different prices for various transportation mode and oil qualities. As such, relaxing the oil export ban may not necessarily eliminate the LTO discount to Brent. Instead it could invite cost-cutting arbitrage of U.s. and international crudes with unpredictable outcomes.

Refiners are split on whether or not to lift the ban depending on numerous operational and geographic factors that determine their bottom line. To the extent the ban discounts U.S. crude to Brent, large U.S. refiners enjoy higher petroleum produce profits. Other U.S. refiners that can preferentially handle LTO also favor the export ban. Those refiners who cannot handle U.S. LTO feedstock because their infrastructure is designed for on low-quality oil imports from Canada, Mexico, and Venezuela are in favor of free trade and do not oppose ending export restrictions. European refiners who can better handle L TO and desire greater competition to moderate Brent pricing are in favor of loosening the U.S. oil export ban.

Manufacturers may not yet have a unified position. Chemical companies took a strong position on LNG exports. But major manufacturers have yet to do so on oil exports. Petrochemical companies worry that lifting the ban could increase the price of domestic crude, which now trades for less than its international counterpart. Still others believe that more oil in the global market will drive down energy prices and create jobs in the United States.

American consumers are concerned about what exporting U.S. oil will mean for gasoline prices. Simple assumptions-more oil at home means energy independence that will lower gasoline prices-lead to misperceptions. Prices are greatly influenced by global factors. Market volatility could be a real challenge in the future. And, in order for LTOs to be produced, global oil prices must remain high. The end of cheap oil and gasoline is over despite the U.S.’s new oil bounty.

GORDON. So about 10 years ago, 8 years ago, before light tight oil was really on anyone’s radar screen and even EIA missed it—everyone missed it, and there are reasons why separately I can discuss—but the move was made to change the entire refining sector to deal with what oil we thought was going to be the last oil on earth, this heavier barrel. And so now we have a situation where billions have been put into U.S. refineries up and down the Mississippi and into the Gulf that handle selective oils best—they are complex refineries and they handle the extra heavy oil. These refineries make diesel. They make more diesel, and diesel goes to your question—has a very high export value. We are exporting a tremendous amount of diesel. The light tight oils that now we found out we have and we don’t really yet have the refining capacity for make, preferentially, gasoline, which is the product we use, so you can imagine ships crossing in the night, you know, with all of this global trade where oil would go one way. It will get refined someplace else. The product will come back.

Mr. PERRY. Thank you, I just want to maybe go back to this last question about refined as opposed to unrefined. It seems to me that the refined product would be more dangerous maybe to the environment if it would spill as opposed to crude oil that comes from the ground—comes from the earth. But if I am wrong—am I wrong or—makes no difference whatsoever. We don’t care whether we spill gasoline or oil or crude. It is all the same?

Mr. JENNINGS. The refined product will evaporate if spilled and crude oil will not. So there is a difference. Worse to the water would be the crude oil, which would be residual in the water, where as to the air would be

Mr. MEDLOCK. But there is a difference between a naturally occurring seep and a spill. A naturally occurring seep is actually part of the local ecosystem that has evolved over thousands of years typically, whereas when you talk about a spill it is an introduction of a raw crude into an area that is not equipped to cope with it. So it is different.

Ms. GORDON. And I just wanted to add, because oils are now so different from each other—we still talk about it as oil coming out of the grounds—but the light tight oils, some of them, especially coming out of the Eagle Ford in Texas, are so light they are condensate and that is what Senator Murkowski was talking about maybe trying to change the definition of oil, and some of the oils coming out of the ground in Venezuela and Canada are so heavy they are on their way to coal. So we are talking about the definition of oil, hydrocarbons, really changing where it is not necessarily one thing anymore. It is a collective of a lot of different hydrocarbon arrangements.

Mr. JENNINGS. The refining system in the United States is, obviously, capable of making the different boutique fuels that are required in different markets throughout the country. They relate principally to vapor pressure, how volatile the material is, octane and now sulphur content is a big focus. The international standard often requires the tighter end of those specifications and so the export barrels typically will be those that would qualify for the most stringent U.S. markets as well.

Mr. PERRY. At what point in this discussion are producers going to leave the oil in the ground? Are we already doing that because refining capacity doesn’t exist? Is that already occurring now and if it isn’t at what point would that occur or will it never occur?

Mr. MEDLOCK. It will certainly occur if the discounts actually get to be sufficient enough. Currently there are a couple different things that are working against this. It is not just an export issue. It is also an infrastructure issue because currently in the Bakken, for example, in North Dakota we move a lot of that crude by rail, which is an order of magnitude more expensive than moving it by pipeline. And this goes back to, you know, getting the appropriate infrastructure in place and there is, obviously, a policy overlay here. But if you were to actually have the pipeline infrastructure in place to move that crude effectively, the netback to the wellhead would be priced $18 to $20 higher. And so that buys a lot more activity in the field. So it is, you know, I hate to focus this only on the export issue because it is broader than that. It actually is—it matriculates down in the infrastructure to move away from the wellhead. And moving crude by rail is a lot more expensive than moving it by pipe.

Ms. GORDON. I was just going to add because it came up, the, you know, consumers and the economy, of course, with oil and gasoline comes up all the time. These oils, if they are stranded in the ground, it will be because the price is too low. It will—it will take a much higher price. So we are talking about more abundance at a high price. This is so different than the 1970s where we were talking very low prices and then supply was getting stuck. This is a lot of capacity—physical capacity of hydrocarbons in the earth that can get out of the ground if the price gets really high. So we are not really—we will see volatility in the market but it is going to have to trend upward to get these oils into the market and move them around and refine them.

Mr. JENNINGS. The Middle East is still producing and exporting 10 to 15 million barrels per day of oil. Even with what we and our North American allies could do, I don’t believe in the near future in our lifetimes we are going to offset that effect.

Mr. YOHO. But it is possible. We can’t use oil or the petroleum products as a strategic diplomatic tool if we do not update our export oil policies and I for one will support the repeal of this policy to increase the ability for us to export so that we can use that as a bargaining chip.

Mr. Milito and Dr. Medlock, do you feel it is possible for us to achieve energy security in the U.S.?

Mr. MILITO. I think we are doing that right now with this tremendous advance in production that we are seeing. Going from 5 million barrels a day to 10 million barrels a day in just a few years is incredible. Nobody would ever have imagined that. Same on the natural gas side. We are expected to import $100 billion a year in natural gas and now we are looking to export.

Mr. YOHO. Well, I mean, that is just it. I mean, 10 years ago we were going to have to export all this but through technology and better techniques we are going to be a net exporter. Do you feel that we could be a net exporter on petroleum products too?

Mr. JENNINGS. First, I want to dispel the myth that it is just light or just heavy. Inside every heavy refinery is a light plant where you are going to not use the full kit. So these plants can refine light crude but not on an optimized basis. They don’t fully use all the capital. Probably half to five-eighths of our country’s refining capacity has capability to cut deeper into the heavy and sour barrel and make gasoline and diesel out of it and the remaining 30, 40% doesn’t have that capacity. What I would say, though, is that this is a snapshot at a point in time. There is a lot of investment being made—condensate splitters, and other things that refining plants are doing. We had one in Cheyenne, Wyoming, that was almost 100% running heavy Canadian. Now we run 50% Canadian, 50% light Bakken.

Currently, the United States is exporting about a million and a half barrels per day on a net basis of refined petroleum products.

Mr. SHERMAN. I would point out on the idea of Ukraine they can’t afford to pay Russia $10 a unit. Japan pays us or is paying $16 so if we were exporting natural gas the Japanese would be offering far more than the Ukrainians could afford to pay unless we want to tax the American people more so that we can provide $6 a unit.

The dream of the—of environmentalists I know is that the tar sands of Canada are never exploited. There are those who say they will build the pipeline—the Keystone. The environmentalists think they can stop that. There are those who say the Canadians will go east or west. There are Canadian environmentalists who are in touch with my California environmentalists who think they can stop that. How uneconomic is it to put that Canadian oil into tanker cars, take it on railroads to a U.S. domestic pipeline and then have it proceed? In other words, if we—if the environmentalists stop the Keystone—stop any pipeline—any Canadian pipeline and they stop any international-U.S. pipeline, can domestic U.S. pipelines bring that oil to the market economically although at lower profits to those who own the tar sands?

Ms. GORDON. Well, it is pretty powerful. You know, the investments up there, at least for the mined bitumen, which has all been invested, it wants to get out and it will do so at a lower profit if it means, you know, mothballing everything that is ready to get out there. So right now, it is moving by rail. There is—I think it is Valero, can’t remember who—someone has put in a variance actually that would take rail bit, which is the diluted—slightly diluted bitumen that you put on rail and then it would just put it right onto a tanker so it would come through—the question would be, is this even U.S. oil? I mean, are we just exporting foreign oil out of Texas by putting Canadian oil on bunkers?

Mr. SHERMAN. So bottom line, that Canadian oil—those tar sands will be exploited. If it is inefficiently on tanker cars it is still more economic than leaving that tar sand in the ground and—do I have that right?

Ms. GORDON. Yes, for the mined bitumen, which is about 20% of the resource, because all of that investment has been made. Big question mark for the in situ, the really deep bitumen that they have to heat out of the ground. It might be that investments aren’t made if it is difficult to move it to market. And then the big question about the oil sands is what do you do with the bottom of the barrel. If we could think of a way to get rid of that pet coke—the bottom of the barrel—they really wouldn’t be that different from any other oil. It is just that they have a very large bottom of the barrel.

Mr. JENNINGS. The difference in price to ship crude by rail versus pipeline from Canada to the Gulf of Mexico is only about $6 a barrel—$5 or $6 a barrel. That isn’t going to go into the producer’s decision making of whether or not to develop incremental oil sands capacity.


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