Fitch: End of U.S. Crude Export Ban Could Spur Investment Shift

Any move by the Obama administration or Congress to reconsider the 40-year-old ban on the export of most domestically produced crude oil could boost price realizations and profits for U.S. exploration and production (E&P) firms. Over the long term, Fitch believes removal of the crude export ban could further accelerate the trend of independent E&P firms rebalancing their portfolios toward North American shale plays, as the economics of onshore U.S. shale investments become more attractive relative to competing international projects.

The export ban, which dates back to legislation passed by Congress in the 1970s following the OPEC oil embargo, effectively shuts in much of the lighter-grade crude oil produced in North Dakota's Bakken region and other U.S. shale resource plays. While certain exceptions are made for crude oil produced in Alaska and other regions, most of the approximately 8.12 million barrels per day of domestic crude oil produced in the U.S. must also be sold within the U.S.

In recent weeks, members of Congress, the secretary of energy and industry representatives have all suggested that a review of the ban is in order. While the prospects for congressional action on the issue are, at best, uncertain in an election year, the Department of Commerce could unilaterally take steps to ease crude export licensing requirements, without new legislation.

With crude exports largely prohibited, a glut of domestic light crude building up on the Gulf Coast has widened the spread between West Texas Intermediate (WTI) and Brent crude over the last three years.

All else being equal, a lifting of the ban would narrow that spread as freer movement of domestic crude to overseas markets would push WTI prices up and Brent prices down. This, in turn, should encourage E&P companies to shift more production to U.S. shale plays as internal rates of return on U.S. investments would improve. Many large producers, including Marathon Oil Corporation and Apache Corporation, have already shifted more production onshore, boosting capex committed to U.S. shale projects.

But the existence of the large WTI/Brent spread, which could widen as domestic light crude production grows, may keep a lid on price-realization expectations by E&P firms, potentially limiting new onshore investment flows if the ban continues. The rapid rise in domestic crude oil production, now expected to approach 10 million barrels per day by the end of the decade, means that the export ban's removal could have a meaningful impact on crude export volumes.

On the flip side, U.S. refiners would likely see some margin compression if the ban ends and Brent and WTI prices converge. Refiners are benefiting from access to significantly discounted U.S. crude oil, and have sharply boosted their exports over the last several years, as refined products are not covered under the export ban. A negative shift in refinery economics resulting from an end to the export restrictions could lead to some offsetting declines in refined product exports.

Further analysis of the likely impact of an end to the export ban across various segments of the U.S. oil and gas industry will be published over coming weeks.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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