U.S. Government Approves Crude Oil Swaps with Mexico While Congress Considers Repealing the Underlying Export Restrictions

Aug 17, 2015

Reading Time : 4 min

Background

U.S. law, namely the Energy Policy and Conservation Act, has essentially banned the export of crude oil since the 1970s. As discussed previously, the legal framework, which is primarily codified in BIS’s Export Administration Regulations (EAR), has multiple exceptions that allow for licensed exports of crude oil in certain narrow circumstances, such as exports to Canada.

BIS also has the authority to approve export licenses for swap transactions, particularly with adjacent countries, that are “consistent with the national interest and the purpose of the Energy Policy and Conservation Act.” Specifically, the EAR directs that these applications must (i) result in a true swap in terms of quantity and quality, (ii) have contractual terms to allow them to be terminated in case of national emergency, and (iii) demonstrate compelling economic or technological reasons, beyond the control of the applicant, why the crude oil cannot reasonably be marketed within the United States. 

Up until recently, BIS did not receive a high volume of export license applications, particularly for swap transactions. However, this reality has changed due to the substantial increase of domestic oil production in recent years. This increase has made it very difficult for the United States to fully utilize existing production because more light crude oil is in the local market than can be absorbed. Nevertheless, imports continue because U.S. refineries were originally designed to handle, and have been processing, heavy crude oil imported from a variety of sources, including Canada, Mexico and Venezuela. 

Heavy crude oil is more dense and has an API gravity of less than 20 degrees, with extra-heavy oil having a density of less than 10 degrees API. Heavy oil also tends to have substantially more sulfur (i.e., “sour oil”) and is more difficult and complex to refine. Light crude oil, such as West Texas Intermediate (WTI), which is significantly less dense and has an API gravity of 39.6, typically trades at a higher price than heavy crude oil as it produces a greater percentage of gasoline and diesel when refined. 

With that in mind, since a substantial portion of the unconventional oil added to U.S. production is light crude, such as WTI, U.S. refiners cannot easily process this product without modification to their existing infrastructure. Consequently, swapping U.S. light crude oil for imported heavy crude would allow the product to be more efficiently processed in current market conditions. This reality has caused a number of companies to seek approval from BIS for swap transactions between the United States and Mexico.

Approval of Swaps with Mexico

As previously mentioned, BIS signaled its impending approval of a number of swap transactions involving Mexico. These applications had been pending with BIS for a number of months, and it appears that the Obama Administration has made a policy decision to generally permit such applications with Mexico when they meet the requisite criteria. At least one of these applications reportedly involves Mexico’s state oil company Petroleos Mexicanos, SA (“Pemex”) and could involve an exchange of as much as 100,000 barrels per day or approximately 1 percent of current U.S. output.

In its statement to Congress, BIS noted that it has also denied a number of applications for similar swap transactions with other countries, presumably that are not adjacent to the United States. This announcement is consistent with the existing legal framework that favors crude oil exports with adjacent countries. Moreover, it highlights that crude oil exports will continue to be heavily restricted unless Congress takes action to repeal the export ban.

Congressional Debate

Legislation to lift the crude export ban entirely is advancing in Congress although it is unclear whether the sufficient votes currently exist, especially in the Senate, to send such a measure to the President for signature. 

When Congress returns this fall, the House of Representatives will likely consider legislation (H.R. 702) sponsored by Congressman Joe Barton (R-TX to repeal the provision of the Energy Policy and Conservation Act of 1975 that directs the President to restrict the export of crude oil. Barton recently stated that he has secured a commitment from the House leadership to move the bill, which currently has 113 co-sponsors, including 13 Democrats. Barton’s comments follow a separate statement by House Speaker John Boehner (R-OH) expressing his support for lifting the 40-year ban.

On July 30, the Senate Committee on Energy and Natural Resources passed the Offshore Production and Energizing National Security Act of 2015. The OPENS Act would, among other things, authorize the export of any domestic crude oil or condensate without an export license (other than crude oil stored in the Strategic Petroleum Reserve) to countries not subject to sanctions by the United States. Although timing for Senate floor consideration is unclear at this point, the OPENS Act would likely require 60 affirmative votes for passage. For supporters of lifting the ban, the challenge of meeting that 60-vote threshold was underscored by the party line 12-10 vote in Committee. 

In response to the Administration’s action, Senate Energy Committee Chairman Lisa Murkowski (R-AK), issued a statement characterizing it as a positive step, but reiterated her commitment to  “the full repeal of the ban on selling oil to our friends and allies overseas. . . as quickly as possible.”

Conclusion

These recent developments demonstrate that further opportunities exist for companies to export crude oil from the United States. Today companies are open to pursue crude oil swaps with companies in Mexico in light of these recent approvals. However, obtaining a license for these transactions will require carefully structuring the transaction to meet the requisite regulatory framework while remaining commercially viable.  

As noted, the legislative process surrounding the repeal of the crude oil export ban is also in full swing. Companies have the opportunity to engage in this process and potentially open markets even further.

Share This Insight

Previous Entries

Akin Trade Law

February 9, 2023

Read More

Akin Trade Law

2023-01-26

At the end of last year, World Trade Organization (WTO) members agreed that the 13th Ministerial Conference (MC13) of the WTO will take place in Abu Dhabi, the capital of the United Arab Emirates (UAE), in February 2024. There is no doubt that the WTO is facing headwinds and is in need of a vigorous push forward. The UAE’s success in transforming itself into a global trade and digital hub and a leader in services trade could serve to drive a successful outcome at MC13.

...

Read More

Akin Trade Law

2023-01-17

On December 21, 2022, the appeal arbitrators in the Colombia – Frozen Fries (DS591) World Trade Organization (WTO) dispute circulated their award (the “Award”). This was the second appeal conducted under Article 25 of the WTO’s Dispute Settlement Understanding (DSU) and the first appeal under the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), a framework created by a group of WTO members to overcome the challenges posed by the non-operational Appellate Body.

...

Read More

Akin Trade Law

2022-02-10

The United Kingdom just issued a new statutory instrument, effective immediately, which extends the authority to designate persons and entities under the U.K. sanctions against Russia.

...

Read More

Akin Trade Law

2020-06-10

We are pleased to share a recording of Akin Gump’s webinar, “Protecting the Crown Jewels - New U.K. National Security Rules for Foreign Investment in a Post-COVID-19, Post-Brexit World.

...

Read More

Akin Trade Law

2020-05-07

The clock is ticking down to the entry into force of the United States-Mexico-Canada Agreement (USMCA) on July 1, 2020.  Leading up to that date, businesses have a unique advocacy opportunity to influence the implementing regulations and associated processes, such as legislative changes to Mexico’s domestic laws. Additionally, the Office of the U.S. Trade Representative (USTR) and U.S. Customs and Border Protection (CBP), along with their Mexican and Canadian counterparts, have begun issuing guidance for the trade community seeking to obtain the benefits of the agreement. At this time, these guidance documents include a petition process for automakers to request alternative staging for the automotive rules of origin as well as general interim implementation instructions for USMCA entries. Still to come are regulations regarding the automotive labor value content requirements and Uniform Regulations regarding the customs provisions. Akin Gump and our partners at Dorantes Advisors in Mexico City have jointly developed brief summaries of these guidance documents and a timeline of key actions still to take place prior to entry into force. The materials are available here in both English and Spanish.

...

Read More

Akin Trade Law

2020-03-02

Last week, in a highly anticipated decision, the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) concluded that Section 232 of the Trade Expansion Act of 1962 does not offend the non-delegation doctrine. To most observers, the ruling does not come as a surprise, but the story on Section 232 and the non-delegation doctrine is not yet over.

...

Read More

© 2024 Akin Gump Strauss Hauer & Feld LLP. All rights reserved. Attorney advertising. This document is distributed for informational use only; it does not constitute legal advice and should not be used as such. Prior results do not guarantee a similar outcome. Akin is the practicing name of Akin Gump LLP, a New York limited liability partnership authorized and regulated by the Solicitors Regulation Authority under number 267321. A list of the partners is available for inspection at Eighth Floor, Ten Bishops Square, London E1 6EG. For more information about Akin Gump LLP, Akin Gump Strauss Hauer & Feld LLP and other associated entities under which the Akin Gump network operates worldwide, please see our Legal Notices page.