Department of Commerce Issues FAQs on Exports of Processed Condensate and Foreign-Origin Crude Oil

December 31, 2014 | Oil, Gas, Resources & Mining

 

On Tuesday, December 30, 2014, the Department of Commerce’s Bureau of Industry and Security (BIS) issued FAQs on crude oil and petroleum product exports, including guidance on the restrictions on the export of crude oil, and the types of liquid hydrocarbons that are considered crude oil under the Export Administration Regulations (EAR).

Most importantly, the FAQs provide guidance on the type of processing required for non-exportable crude oil to be considered exportable petroleum products. Under the EAR, liquid hydrocarbons that have not been processed through a crude oil distillation tower are classified as crude oil and, therefore, are not exportable. 15 CFR 754.2(a). Liquid hydrocarbons that have been processed through a crude oil distillation tower are classified as petroleum products, and are exportable.

Release of the FAQs followed months of uncertainty regarding the breadth of commodity classification decisions that BIS issued earlier in 2014 to Pioneer Natural Resources and Enterprise Products Partners regarding condensate stabilized at the field level through a distillation process. In each of those two decisions, BIS confirmed that the companies correctly classified the resulting offtake products as “EAR99,” a basket category of items that are subject to the EAR but that generally may be exported without a license. (EAR99 items may require a license for export in specific circumstances, such as to embargoed destinations or to persons to whom U.S. export privileges are denied.) Numerous other companies reportedly sought similar classification decisions following public disclosure of the Pioneer and Enterprise rulings, but BIS apparently determined to hold these requests until it was able to establish a common, written, and public analytical approach to ensure consistency in decision making across similar situations, and to permit confidence among exporters who choose to self-classify their products rather than to seek a BIS classification decision.

In the FAQs, BIS clarifies that in order for liquid hydrocarbons to be classified as petroleum products, there must be material processing through a crude oil distillation tower. Factors that BIS will consider in determining whether material processing through a crude oil distillation tower, include:

  • Whether the distillation process uses heat to materially transform the crude oil into chemically distinct liquid streams
  • Whether the distillation process utilizes temperature gradients and has significant internal structures
  • Whether the distillation process uses towers with greater complexity than equipment used to separate vapors from liquids for transportation needs
  • The change in API gravity between the input and output of the processing
  • The change in percentage of different types of hydrocarbons between the input and output of the processing
  • Whether the output streams have purposes other than allowing the product to be classified as exportable petroleum products

Processing crude oil through flash drums with heater treaters or separators, which utilize pressure reduction alone or pressure changes at a uniform temperature, do not constitute processing through a crude oil distillation tower.

The FAQs also provide clarity on the acceptable level of U.S.-origin crude that can be commingled with foreign-origin crude oil and still be eligible for export. Under the EAR, foreign-origin crude oil can be exported from the United States as long as it is not mixed with U.S.-origin crude. The regulations do not specify a de minimis amount of permissible mixing but the FAQs clarify that BIS understands that a “minimal amount of mixing may occur due to incidental contact in pipelines and/or storage taken when foreign and U.S.-origin oil is sequentially transported or stored in the same pipeline or tank.” BIS encourages applicants for licenses to export foreign-origin crude to include in their applications an explanation of the precautions they are taking to ensure only minimal mixing with U.S. crude oil.

The Implications

The BIS FAQs provide clarity to companies seeking to export processed condensate and foreign-origin crude oil. While there has been no change in policy, in practice the BIS guidance will likely lead to an increase in processed condensate exports. Companies seeking to export processed condensate based on the BIS guidance may submit commodity classifications to BIS to confirm that the product is an exportable petroleum product or can self-classify and export, as permitted under the regulations.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Theodore Kassinger, an O'Melveny partner licensed to practice law in the District of Columbia and Georgia, and David Ribner, an O'Melveny associate licensed to practice law in the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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