US to allow oil swaps with Mexico: UpdateOREANDA-NEWS. August 17, 2015. The US is taking another cautious step toward easing its long-standing limits on exporting US crude.

The US Commerce Department today notified a handful of US oil companies seeking to swap crude with Mexico that their applications will be approved. But those approvals come with conditions, including a restriction that companies not re-export the Mexico crude to other countries.

In what could prove a much-sought escape valve for growing volumes of US light, sweet crude oil, Commerce's Bureau of Industry and Security (BIS) "is acting favorably on license applications for the exchange of US crude oil for similar quantities of Mexican crude oil," a senior US administration official said.

Mexico's state-owned Pemex in January asked Commerce to approve a request to swap 100,000 b/d of US light oil in exchange for Mexican heavy crude. Pemex has been seeking to import US light crude to blend with domestically produced oil supplying three of its six refineries.

The refineries that would receive the imported feedstock are the 430,000 b/d Tula in the central state of Hidalgo, 245,000 b/d Salamanca in the nearby state of Guanajuato, and 330,000 b/d Salina Cruz on the Pacific coast.

BIS did not say how much oil it will allow to be swapped, but regulators will be keeping tabs on the volumes of oil heading south. Approved license applications will cite specific quantities of oil, and each application will be handled on a case-by-case basis. The oil companies will have one year to deliver the volumes stipulated.

While the BIS' restrictions will not allow for the re-export of the crude, companies will have the authority to refine that crude and export the refined products. Unlike crude, the US does not limit the export of gasoline, diesel and other refined products.

While approving swaps with Mexico, BIS is denying a number of applications for crude or product exchanges with other countries.

Commerce's decision to approve swap deals does not represent a change in US law. Commerce has long had authority to approve export applications. But in authorizing the Mexico swaps, regulators are giving new emphasis to language in the Energy Policy Conservation Act of 1975, which directs Commerce when limiting crude exports to take into account "the historical trading relations" the US has "with Canada and Mexico." And BIS regulations have long allowed US companies to export crude to Canada.

The decision to allow crude swaps with Mexico follows BIS' decision last year to allow the export of lightly processed condensate, which regulators have concluded qualifies as a refined product.

Pemex welcomed the agreement saying the heavy crude the country currently produces hurts the efficiency of its refineries, leaving it with high levels of oil residuals "that are difficult to place on the international market at a good price." The deal will also help cut costs such as the transport of raw material, Pemex said.

The US last exported oil to Mexico in May 2012, shipping 5,000 bl that month, Energy Information Administration data show. Since 1996, the US has exported only 384,000 bl to Mexico. Of that total, 201,000 bl were shipped in August 1996.

That total since January 1996 is less than half the amount of oil the US imported from Mexico per day last year. US imports from Mexico averaged 781,000 b/d in 2014 and 587,000 b/d in May 2015.

Oil industry trade group the American Petroleum Institute applauded the decision. API executive vice president Louis Finkel said "trade with Mexico is a long-overdue step that will benefit our economy and North American energy security, but we shouldn't stop there."

George Baker, executive vice president of the producers' coalition Producers for American Crude Oil Exports, which has been lobbying for a lifting of the export restrictions, called the decision "a no-brainer," given the "mismatch between the crude oil produced in the U.S — mainly light sweet crude — and our refinery configuration — which processes more medium and heavy crudes."

Many US refiners have voiced opposition to easing the US crude export restrictions without other changes to domestic crude transportation.

US independent refiner Valero said the Commerce Department's decision "does not sound like there is much new here."

Commerce has always had the authority to authorize such swaps, and the oil from Mexico would probably have ended up in the US anyway. This shows that there are processes in place to get the right kinds of crude oil where it needs to be."

Wells Fargo Securities said in a report today that the decision is likely to have negative effects on refiners. "We do not expect the initial volumes will be that significant. That said, a further crack in the export ban will likely negatively impact the US independent refiners via narrower crude differentials over time." But Wells Fargo said the export volumes "could clearly grow over time."

Law firm Sutherland partner Jacob Dweck said the volumes of crude to be swapped could perhaps be as little as 50,000 b/d. Dweck said he does not expect the swaps to have much impact on US domestic prices given what are expected to be relatively small volumes of crude, possibly only part of the total 100,000 b/d requested by Pemex reflecting market conditions and refinery logistics in Mexico.

Energy research firm ClearView Energy Partners said that given Mexican refining capabilities, the volumes of light sweet crude to be exported are unlikely to exceed 200,000 b/d and "could be considerably less," depending on the price differential between Mexico's Maya crude and Light Louisiana Sweet.

For US companies the economics of a swap for Mexican crude would work best when a deep discount exists between the US benchmark WTI — which Mexican crude is priced on — and Brent, which is used to price most competing waterborne crudes. But even a narrowing WTI to Brent discount could work given the higher transportation costs for more remote crudes.

For Pemex the swaps are advantageous when the lighter crude allows it to get better gasoline yields from its refineries, letting it displace imports of refined products.

ClearView said the Commerce move could be the US administration's way to tell lawmakers on Capitol Hill agitating for a repeal of export restrictions imposed in the wake of the Arab oil embargo "Back off — we got this."

Senate Energy and Natural Resources Committee chairman Lisa Murkowski (R-Alaska) applauded the decision but said she remains "committed to the full repeal of the ban on selling oil to our friends and allies overseas."

Senator Edward Markey (D-Massachusetts) argued the Commerce Department decision "shows that there is already sufficient flexibility" under the US oil export controls. Markey said the export restrictions protect the US' consumers, businesses and national security and "should not be weakened or repealed."