Oil exports permitted for the first time in 40 years.
On December 18, the US Congress passed H.R. 2029, ominbus appropriations legislation that provides discretionary funding for the federal government for the current fiscal year. This legislation provides funding for numerous annual appropriations bills through the fiscal year ending September 30, 2016 and addresses several policy items, including the longstanding ban on exports of crude oil from the United States.
Specifically, Title I in Division O of H.R. 2029 repeals Section 103 of the Energy Policy and Conservation Act (EPCA). That section of the EPCA, enacted in 1975, directed the President to ban crude petroleum oil exports except under select circumstances or unless the President determined the export “to be appropriate and consistent with the national interest and the purposes of [the EPCA].” As discussed further below, circumstances allowing export have rarely occurred.
Title I of Division O of H.R. 2029 further establishes a new national policy that virtually eliminates oil export restrictions. Section 101(b) of the legislation states that except under specific circumstances relating to emergencies and sanctions of foreign entities:
To promote the efficient exploration, production, storage, supply, marketing, pricing, and regulation of energy resources, including fossil fuels, no official of the Federal Government shall impose or enforce any restriction on the export of crude oil.
The specific circumstances concerning emergencies and sanctions of foreign entities are addressed in Sections 101(c) and (d) of the legislation. Under Section 101(c) of Title I of Division O, the President retains all authority to prohibit exports to the extent that such authority is necessary to impose sanctions on a foreign person or foreign government, including designees as state sponsors of terrorism. Under Section 101(d) of Title I of Division O, the President is authorized to impose export licensing requirements or other restrictions on crude oil exports for no longer than one year if (a) the President declares a national emergency; (b) the restrictions are in the context of sanctions or trade restrictions imposed for national security reasons; or (c) a finding of supply shortages is made by the Secretary of Commerce, and those shortages are likely to cause sustained adverse domestic employment effects.
The repeal of Section 103 of the EPCA marks a monumental reversal in domestic policy as it relates to oil exports. For the last few decades, statutes and regulations have restricted US industry from exporting crude oil. Those restrictions have been promulgated through various provisions that date back to the enactment of the Export Control Act of 1940. In the last 40 years, the President, through the US Department of Commerce, possessed limited authority to exempt certain crude oil from the prohibition on exportation. The broad 40-year ban on US crude oil exports was enacted in 1975 after Organization of the Petroleum Exporting Countries’ (OPEC’s) oil embargo against the United States and other countries in retaliation for their involvement in the 1973 Arab-Israeli War. There were a few limited exceptions, including oil that originates from Alaska’s Cook Inlet and North Slope, oil shipped to Canada for consumption, and certain heavy oil from California. The Department of Commerce also gave permission last year in private rulings for two companies to export processed condensate, and it has since clarified publicly that some condensate may be exported if it has been processed through a crude oil distillation tower. The Department of Commerce recently announced that it will begin to allow limited exports of US crude oil to Mexico in exchange for imported Mexican oil. Beyond these instances, crude oil exports have largely remained prohibited.
As a result of technology advancements that allow for production of oil from shale, the picture has changed. By 2015, domestic production is expected to hit its highest level since 1972. Although the Energy Information Administration (EIA)—the analytical arm of the US Department of Energy—estimates that average production levels are expected to decrease from 9.3 million in 2015 to 8.8 million in 2016, this still represents a major increase in US production from the start of the shale boom.
As domestic oil production has increased, a dialogue has evolved concerning whether current export regulations should be modified. Several bills were introduced last year to repeal the ban, and several more bills have been introduced this year for the same purpose. Title I of the legislation enacted on December 18, 2015 responds to those efforts with a dramatic change of policy that will generally enable US oil exports for the first time in over four decades.
Although monumental, lifting the export ban is unlikely to relieve current price pressures on US producers. West Texas Intermediate prices have come much closer to parity with Brent recently, so it remains to be seen how much (if any) premium can be captured by overseas sales of US crude oil. Nonetheless, this legislation should be welcome news for the US oil industry in the current challenging environment.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Kenneth S. Komoroski