The recent ruling by the Commerce Department, which allows Pioneer Natural Resources (PXD) and Enterprise Product Partners (EPD) to export light "condensates," puts an effective end to the export ban. It will have multiple effects on the exploration-and-production companies working in the Permian, Eagle Ford and Bakken shale plays, as well as on domestic refiners. But, even more important, it represents another stupid U.S. energy policy decision that is blind to long-term U.S. energy needs and does nothing except increase the profit of a few domestic E&P players.
Many analysts have discounted this decision to allow very marginally distilled crude oil to be considered a "refined" product and for its export to be allowed. But this is a giant crack opening up in an export ban that has been in place since the 1970s and has kept domestic crude at home. Pioneer CEO Scott Sheffield has been lobbying for an end to the ban, as has Harold Hamm of Continental Resources (CLR), and now they have the workaround they need to avoid a Congressional battle.
The Commerce Department will soon be flooded with similar requests for condensate workarounds -- from Continental, Cimarex (XEC), EOG Resources (EOG) and several other lesser players. All of these firms will now be able to recapture the margin discount between domestic and global crude and the current discounts on Permian and Bakken oil.
Shares of refiners with Gulf Coast operations, such as Valero (VLO), got pummeled on Wednesday. That's no fluke. The margin advantage that they've enjoyed, which has allowed them to mint money over the last three years, is about to disappear. I wouldn't own any refining stock until the market gets a better sense of just how deep this export workaround will go.
I'm betting that a new oil business will emerge from this Commerce Department ruling, and that crude "distillation" units will start popping up near the hot shale plays. This, I believe, is Enterprise's focus in appearing as part of this latest dispensation for export: Processing and transport companies will benefit from the coming end of the export ban. I can foresee two million barrels a day of "condensate" being exported in the next two years.
Opponents to the end to the export ban claimed that free export of domestic crude would lead to higher gasoline prices, but that's just a canard. Gas prices have been tethered financially to global prices of crude, and refiners will not be able to pass along their margin discount to drivers at the pumps. That's the good news.
For U.S. shale players producing very light crude, a green light has been given to ramp up already-frantic production -- and these companies will do just that. In doing so, they'll capture a global price that is at an $8-a-barrel premium, not even counting a further local negative differential. If you've been a long-haul holder of these stocks, this is the catalyst you've been waiting on for the next big leg up in share prices. That could also be seen as good news, if you're a shareholder.
But the really bad news is that the floodgates have been opened on the already-breakneck pace of emptying our domestic natural resource of crude oil from shale, and this for the benefit of only a few shareholders and E&P CEOs. The U.S. will gain nothing in energy independence, little if anything in lower energy prices and very limited economic benefit in jobs and growth.
In five years, when the Bakken and Permian plays are quickly eroding and on their way to being spent, we'll wonder why we chose to send overseas a domestic resource that could have lasted a generation or more and could have powered U.S. businesses. We'll wonder why we've again become a dependent consumer of overseas oil supplies.
