When the U.S. Department of Commerce ruled that Enterprise Products Partners L.P. (NYSE: EPD) and Pioneer Natural Resources Co. (NYSE: PXD) could begin exporting condensate, U.S. oil refiners’ stocks were pummeled. Every time the federal government puts its thumb on the scales, there are winners and losers: this time the refiners lost and production companies won.
But what did the producers really win? They won the right to export minimally refined condensates such as ethane, butane, propane and naphtha. There is virtually no crude oil as we usually think of it included in the liquids that the Commerce Department has ruled could be exported. And most of these exports will not be used to make fuel, instead are going to make plastics, solvents and other petrochemical products.
The Commerce Department uses a definition of crude oil with two requirements: 1) that the stuff existed in a liquid form in underground reservoirs, and 2) the stuff remains liquid at atmospheric pressure after passing through a separating facility but not through a distillation tower. Refineries are just large distillation towers, and once crude oil is passed through a refinery it is no longer considered crude oil.
What Enterprise and Pioneer have been given permission to do is run the crude oil through a distillation tower just long enough to produce stuff that is neither crude oil nor fuel. The Commerce Department’s ruling did not reveal what the two companies plan to produce and export.
Kinder Morgan Energy Partners L.P. (NYSE: KMP) is scheduled to begin in July processing crude for BP PLC (NYSE: BP) at a so-called splitter plant with a capacity of 100,000 barrels a day. Kinder Morgan says the plant will cost $370 million, about 90% less than a full-blown refinery. Valero Energy Corp. (NYSE: VLO) and Phillips 66 (NYSE: PSX) have both indicated they may follow Kinder Morgan’s lead and build splitter plants of their own.
Whether or not the U.S. Congress officially lifts the ban on crude oil exports, that ban has now been consigned to the dustbin of history. The only thing that remains to be done is for the Obama administration and the Commerce Department to create a new definition of refined products based on some minimal level of distillation.
Had such a definition been in place before last week, the Commerce Department’s ruling would likely not have cause the stock of Valero to drop 9.5% or shares of HollyFrontier Corp. (NYSE: HFC) to fall more than 8%. Defining what is crude oil and what is not ends the ban on crude oil exports as effectively as does new legislation, and it does so without all the political blowback. It should happen soon.