Monday Mailbag: What Happens to MLPs if the Crude Oil Export Ban Is Lifted?
I’ve heard that a bill is being fast tracked to allow crude exports. First, how likely do you think it is that a bill will pass, and second, if a bill does pass, what would that look like for production levels and midstream MLPs?
S1372, the American Crude Oil Export Equality Act (introduced in May 2015), and HR702 (introduced in February 2015) are companion bills in the Senate and the House of Representatives that seek to lift the ban on crude oil exports. Bills are sometimes introduced simultaneously in the Senate and the House. The bills are identical and allow both lawmaking bodies to consider the bill at the same time. While the vote of a senate panel and John Boehner’s support for lifting the export ban have ratcheted up speculation that the US may see the end of the 40-year-old law, GovTrack, a resource for tracking the likelihood of bills passing, gives the bill a 6% chance of passing in the Senate and a 5% chance of passing in the House.
Absent trying our luck with Miss Cleo, there is no surefire way to predict the fate of this bill. And there is also no foolproof way to predict the exact effects on domestic production if the bill were to pass. On one hand, bill supporters contend that it will encourage domestic drilling as US crude becomes competitive on the world stage. More drilling could mean more gathering lines, storage tanks, processing facilities, and long-haul pipelines. Increasing the need for the build-out of infrastructure is obviously a potential benefit for MLPs, a story that is currently playing out with natural gas as the US is poised to begin exporting LNG at the end of this year. In addition, since many petroleum midstream businesses operate on a price-times-volume revenue model, increased volumes could also benefit existing assets.
Now, not to be Debbie Downer, but there is no guarantee that the scenario described above would unfold like an episode of Law & Order. Two potential factors currently driving down world crude prices are increased US production and the strength of the dollar. Allowing crude oil exports could raise the magnitude of both of these factors, resulting in even lower crude prices. And lower prices would likely decrease the motivation for additional production. This would put the US in kind of a “you made your own bed and now you have to lie in it” situation. Would the US ultimately be made to regret the choice to export crude oil? A recent EIA study examines this question in more detail, but precise outcomes “depend on future domestic production, which itself depends on the characterization of resources and technology as well as future crude oil prices.”
Also, it’s worth noting that the US would likely be exporting its light sweet crude since a significant amount of US refining capacity is designed to process heavy crude and the energy renaissance has been largely fueled by the production of light sweet crude. Some countries, like Mexico, might welcome our light sweet crude, but would the rest of the world share the same sentiments? This is a question for another mailbag, but certainly something to consider when examining the potential outcomes, should the export ban be lifted.