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Murkowski, Heitkamp Push Oil Export Bill

Investors Take Note

Posted May 18, 2015 at 3:12PM

Last week, Lisa Murkowski, the chairman of the Senate Energy and Natural Resources Committee, said: “The idea that oil exports would still be prohibited is mind-boggling.”

She said this after she and North Dakota Senator Heidi Heitkamp unveiled legislation to lift the 1970s-era ban on crude oil exports from the U.S.

It is currently illegal for producers to export crude oil except to Canada and through some special exceptions for Alaska and California. Recently, Enterprise Products Partners (NYSE: EPD) and Pioneer Natural Resources (NYSE: PXD) were also given permission to export lease condensate — a lighter form of oil — in small doses.

At the time Pioneer and Enterprise were permitted to export condensate, my colleagues and I called the move by the Energy Department a precursor to the lifting of the oil export ban. Now that there's a bill with bipartisan support that will do just that, it seems inevitable.

The bill was introduced last Wednesday and will be vetted more thoroughly at a June 4th hearing concerning standalone energy bills like this one, as well as a broader energy package.

According to those involved in these discussions, the bill could also be lumped into the broader energy package to give it a stronger footing once (if) it is passed.

Like we've said many times, it's inevitable that the oil export ban will be lifted, but will it happen now?

There are many good reasons for members of Congress and the President to say yes to oil exports, but as is so often unfortunately true, the bill won't escape the sway of special interests...

Reasons the Bill is Being Pushed Now

The sponsors of the bill have many reasons for lifting the ban on crude oil exports, but perhaps none more prominent than price.

Right now, Brent crude, the global benchmark, costs about $8 more than U.S. WTI crude...

%248Diverge

The green line above shows the spot price for Brent crude over the last four months compared to the black line, which shows the spot price for WTI over the same time period.

As you can see, WTI typically tracks lower than Brent because the U.S. remains isolated in its crude production. That is, the U.S. has created a domestic glut in oil prices because its production is the highest it's been in decades.

Because of this, producers want to take advantage of the $8 difference in price by exporting some U.S. oil abroad.

Even though $8 per barrel sounds like very little, for the low-margin shale producers, it means a lot more breathing room for exploration and for paying down debt.

Which brings up another reason for the bill to be passed: The major growth in U.S. production has been in shale oil, which is a light, sweet blend, but most U.S. refineries are geared to refine heavy, sour crudes from the Middle East.

To help balance the scales, Heitkamp and Murkowski think it beneficial for drillers to ship some of their light oil abroad while refiners import heavier crude.

Of course, you may think the major obstacle in passing such a bill would be the veto of President Obama. But when you look closely at his record on energy, Obama is friendly to fossil fuels when the moves aren't overly publicized...

Keystone XL is dead because it became a toxic subject in the press, but Obama recently approved exploration of the U.S. Arctic, and he consistently touts natural gas and oil drilling job growth.

So if this bill remains bipartisan, and if it doesn't fuel a media uproar like Keystone XL did, then the export ban could be lifted — perhaps later this year.

That said, there are still some serious obstacles...

Exercise Caution

Although President Obama occasionally proves friendly to the fossil fuel industry, he could still veto this bill if it doesn't allow for limits on the amount of oil that can be exported.

According to him and a few commentators out there, the U.S. shouldn't allow full-blown exports until we can export more than we import, which is still not the case.

But the bigger problem facing this bill is passage in Congress...

You see, although Heitkamp says, “There is a desperate need to open up the international markets for North Dakota Crude,” she remains the only Democrat that supports the bill.

Joe Manchin, the Democratic senator out of West Virginia, has yet to endorse this bill, but he has said in the past that he believes the U.S. should lift the export ban.

Of course, there's still time, and if the Senate and House put oil exports into a more comprehensive reform package, there's room for compromise that could draw in more Democrats.

Still, the biggest obstacle remains major U.S. refiners, who will surely lobby against the bill.

Take a look at these charts...

ProductMap

ProductExport

You see, while oil exports are restricted, there are absolutely no export restrictions for refined petroleum products like propane, gasoline, and distillates.

This means U.S. refiners have been able to take advantage of the price difference in Brent and WTI by refining WTI and exporting it to Europe, Asia, and Africa and reaping profits off of the discount.

The export bill threatens this stream of profits directly, so there's no doubt in my mind that refiners will lobby hard against this legislation.

Still, Congress may see this upcoming energy bill as one of the few times it can compromise over the next couple of years, and the President will be eager to pass a bill that will improve the U.S. economy and our standing with our allies.

Good Investing, 

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Alex Martinelli

With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor's page.

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