US oil export ban poised to loosen with Mexico request

The 40-year-old ban on most US crude exports is set to be loosened after Mexico’s state-owned oil company asked for an exception.

Petroleos Mexicanos is in talks with the US Commerce Department to import 100,000 barrels a day of light crude to increase Mexico’s gasoline production and improve refining. Pemex, as the world’s ninth-largest oil producer is known, would send its heavy oil to US Gulf Coast refineries in exchange.

Oil producers including Exxon and Continental have called for the US to end the restrictions, saying booming domestic output reduces the need to keep supplies at home. US oil supply has increased by 66 percent in the past five years, and a majority of that growth is in light oil from shale rock.

It would be another incremental allowed export “that will help relieve the pressure on pricing of domestic light oil, of which we have an excess,” Jacob Dweck, a partner with Sutherland, Asbill & Brennan LLP said. “The announcement suggests that this was done pursuant to some pre-arranged understanding between the two countries.”

Commerce Department officials didn’t immediately respond to requests for comment.

Pemex’s request comes a week after President Barack Obama’s administration opened the door for expanded exports of an ultra-light type of crude oil known as condensate that has gone through minimal processing. The Commerce Department published guidelines on its website for such exports December 30, the first public explanation of the rules involved.

Brent, the global benchmark grade, added 27 cents to $51.23 a barrel on the London-based ICE Futures Europe exchange at 12:44pm Singapore time. West Texas Intermediate gained 39 cents to $49.18.

The US bans most exports of unrefined crude, with exceptions such as shipments to Canada. The US shipped a record 502,000 barrels a day of crude in November, according to US Census trade data.

Adding swaps with Mexico, condensate shipments and other exempted channels into the fold could expand US exports to more than 1 million barrels a day early this year, Citibank said in a November report. That would make the US the 12th biggest oil exporter in the world, ahead of OPEC members Algeria and Qatar, according to the Joint Organisations Data Initiative.

The 1975 Energy Policy and Conservation Act, which created restrictions against exporting US crude, states that the law shouldn’t interrupt the trading relationship between the US and Mexico or stop oil exchanges made for convenience or transportation efficiency.

Mexico’s oil production fell for a 10th consecutive year in 2014, tumbling to the lowest output since at least 1990, when the government first began releasing data. The request comes at a time when oversupply has pushed West Texas Intermediate crude below $50 a barrel, the lowest since 2009.

Pemex exported 803,000 barrels of oil a day to the US last year and will continue to do so regardless of the decision on the light crude import request, the company said in a statement. The heavy crude it would exchange wouldn’t be in addition to what it already sends.

The US can create a release valve for its booming light oil production while also throwing an economic lifeline to Mexico’s economy, which has been hurt by low oil prices, said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis.

The US oil would be used at Pemex refineries in Salamanca, Tula and Salina Cruz, which have a combined capacity of 825,000 barrels a day, according to data compiled by Bloomberg. Mexico’s government approved energy reforms last year that allowed its refiners to import oil, after decades of relying on its own production.

Light oil is easier to refine, and typically is more valuable than the heavy oil that constitutes most of Mexico’s production.

Many refineries on the US Gulf Coast were designed to process heavy crude from Mexico and Venezuela, said Dweck, who worked with Houston-based Enterprise Products Partners LP last year to obtain approval for exports of processed condensate. Trading light US oil for heavy Mexican would provide another outlet for US shale and relieve political pressure for a larger overhaul of crude export regulations, he said.