Legal Quick Hit: U.S. Crude Oil Export Controls Rules, Procedures and Opportunities for Change

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1 Jacob Dweck, Partner David M. McCullough June 19, 2013 Legal Quick Hit: U.S. Crude Oil Export Controls Rules, Procedures and Opportunities for Change U.S. Crude Oil Production Increasing Dramatically 1

2 U.S. and Canadian Production Increasing Pressure on Exports U.S. Export Restrictions Rooted in Time of Shortage 4 2

3 What is Crude Oil that Requires a License? Mixture of hydrocarbons that Exists in liquid phase in underground reservoirs and after surface separation and Which had not been processed through a crude distillation tower Includes: Lease condensate Reconstituted crude petroleum Liquid hydrocarbons produced from tar sands and oil shale Does not include: Plant condensate Topped crude oil Residual oil Other finished and unfinished oils Where Exports Are Allowed: Export of U.S. Origin Crude to Canada Export of Foreign Crude Swap of U.S. Crude Other Exports Designated in Rules and those in National Interest Export of Finished and Unfinished Products Export of Crude/ Product Blends License Required No License Required License May Be Required 6 3

4 Exports to Date Reflect these Restrictions Exports of U.S. Origin Crude Oil to Canada In most cases, no restrictions on volumes or modes of transport No restrictions on buyers (but must be identified) U.S. crude must be used or consumed in Canada Re-export from Canada to non-u.s. destinations is prohibited, even as part of blend with Canadian crude 4

5 Exports of Foreign (i.e., Canadian) Origin Crude Oil Law authorizes export from U.S. of foreign crude oil meeting two requirements: Origin Requirement: Exported crude must be of foreign origin Segregation Requirement: Foreign crude cannot be commingled with U.S.-origin crude throughout its transit, storage and terminaling in U.S. Minimal interface in pipelines and tanks may be acceptable Can be Exported to Any Country Swap Export for Import: Overall Transaction Exported crude cannot be reasonably marketed in U.S. for compelling economic or technological reasons EXPORT U.S. result directly IMPORT Foreign Import of equal or greater quantity and equal or better quality of crude oil or Import of petroleum products that is no less than would be derived by refining the exported crude oil 10 5

6 Other Permissible Exports: Opportunities Alaska Cook Inlet Strategic Petroleum Reserve Exchange Must directly result in importation of refined products needed in the U.S. Heavy California Crude Gravity of 20 degrees API or lower Only 90 day export license Restricted Crude: Outer Continental Shelf Crude Naval Petroleum Reserve Crude Trans-Alaskan Pipeline Crude Not to exceed 50,000 bbls per day Very Restricted shipping routes and shipping procedures Mineral Leasing Act Pipeline Crude Applying for a License Administered by Bureau of Industry and Security (BIS) at Department of Commerce Strict enforcement of restrictions and exceptions BIS encourages an informal notification of an incoming application, particularly if unique issues are involved Application submitted online through BIS website Specific requirements and documentation depend on the basis for the license Application process is confidential: Not subject to public disclosure No readily accessible licensing precedent 12 6

7 Use of a License Export only by licensed party license non-transferable Sales only to purchasers and destinations identified on license (but can list many) Restrictions on origin, transport or use of exported crude may be recited Process for modifying license Addressing issues involving trading of oil before export (chain of ownership) 13 Compliance and Penalties Export controls strictly enforced Compliance programs and audits Potentially severe penalties Civil Penalties: Not to exceed the greater of $250,000 or twice the value of the transaction Criminal Penalties: (1) Up to the greater of $1,000,000 or 5 times the value of the transaction; and (2) 10 years imprisonment Additional Penalties: Denial of export privileges and seizure/ forfeiture of goods Voluntary disclosure process 14 7

8 Prospects for Change Right Conditions Possible Scenarios Widening price spread U.S. producers challenged Gasoline pump prices lower Geopolitical benefits (Canada, Mexico) Congressional opposition managed Effective industry advocacy Crude trades with Mexico Liberal interpretation of swap regulation Exports to FTA countries Exports of (lease) condensate Exports of limited volumes and for limited period 15 Jacob Dweck Partner A member of Sutherland s Energy and Environmental Practice Group, Jake Dweck has diverse experience in energy policy and a legal practice spanning 37 years, including matters involving oil, natural gas and LNG, electric power, climate change, renewable resources, and energy futures and derivatives. In each area, Jake has helped major clients achieve solutions and strategies in all facets of energy-related transactions and commercial matters, regulatory and policy proceedings, and dispute resolution. 8

9 David M. McCullough Associate David McCullough is a member of Sutherland s Energy and Environmental Practice Group. David regularly counsels clients on environmental legislation, regulation and policy affecting the refined product and renewable fuel industries. In this capacity, David advises producers, blenders, importers and traders of petroleum products and renewable fuels on regulatory compliance, in enforcement proceedings, with negotiating contractual provisions and in litigation when disputes arise. SUTHERLAND S ENERGY AND ENVIRONMENTAL PRACTICE Sutherland s Energy and Environmental Group has more than 60 lawyers representing every major sector of the energy industry. Our 40-year history of excellence in serving the regulatory, compliance and policy needs of our clients is matched by the commercial and operational experience we bring to increasingly complex transactions. Complemented with our team of wellregarded, high-profile litigators, Sutherland s energy practice is well positioned to provide the full range of legal services to our energy clients. Our clients include crude oil and natural gas refiners and producers, domestic and multinational traders, energy lenders and marketers, hedge funds and financial institutions, independent power producers and electric cooperatives, international oilfield service providers, and renewable energy developers. 9