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US approves landmark crude oil export swaps with Mexico

Friday, 14 Aug 2015 | 2:51 PM ETReuters

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Susana Gonzalez | Bloomberg | Getty Images

An engineer opens valves on the Petroleos Mexicanos (PEMEX) Bicentennial deep sea crude oil platform in the waters off Tamaulipas, Mexico.

The Obama administration will allow limited sales of U.S. crude to Mexico for the first time, a senior administration official told Reuters, marking another milestone in loosening a contentious ban on exporting domestic oil.

The Commerce Department is "acting favorably on a number of applications" to export U.S. crude in exchange for imported Mexican oil, the official said. Such oil swaps are one of several possible exemptions allowed in the four-decade-old law that otherwise bans most overseas shipments.

The approvals come eight months after Mexico formally sought permission for a swap, a historic step for a nation where oil self-sufficiency has long been a source of pride. The shipments, likely to be lighter, high-quality shale oil, will help Mexico's aging refineries produce more premium fuels. U.S. refiners will continue to get Mexican heavy oil, a better match for them than the deluge of light oil coming from Texas and North Dakota.

The licenses, good for one year, will be formally issued by the end of August, the official said. He declined to offer further details on volumes, saying only that the number of approvals was "a handful."

Mexico's state oil company Pemex said in January it was seeking an exchange of about 100,000 barrels per day, equivalent to only about 1 percent of current U.S. output.

The department also denied several applications for swaps with other countries in Asia and Europe, which are not afforded the same special consideration as Canada and Mexico in the 1975 energy law, the official, who declined to be named, said.

Although limited in scope, the move toward freeing up trade will please U.S. oil producers such as Pioneer Natural Resources and ConocoPhillips, which say the restrictions force them to sell oil at below global market rates as shale oil boom created a glut of light crude.

It may also add momentum to efforts mostly by Republicans to repeal what they see as a relic of the 1970s Arab oil embargo era and fears of energy insecurity.

Two Texas lawmakers, Democratic Representative Henry Cuellar and Republican Representative Will Hurd, said in a joint statement Friday the development is a boon for the state's Eagle Ford shale production area.

"These swaps will further positively impact energy exploration in Texas and the United States," Cuellar said.

Repealing the overall ban would be a blow for refiners such as PBF Energy, which have benefited from a sudden abundance of discounted domestic shale oil that their foreign rivals cannot buy.

President Barack Obama has the power to crack the door wider to oil exports, such as simply allowing exports to Mexico without the need for exchanges, or including shipments in upcoming regional trade deals.

But he faces pressure from some fellow Democrats and many environmentalists to move slowly. Critics say a full repeal could raise U.S. gasoline prices, although a slew of research studies suggest liberalizing trade would more likely lower the costs for U.S. consumers.

Environmentalists say crude exports would encourage more oil production and boost carbon emissions they seek to curb.

Andy Lipow, president of Lipow Oil Associates, said the deal fills a need at Mexican refineries for light, sweet crude.

"It's another crack in the wall for the exporting of light sweet crude out of the US," said Andy Lipow of Lipow Oil Associates.

"Many of their refineries are not configured to upgrade the bottom of the barrel," said Lipow.

Mexico will export heavy crude to the U.S., which can easily be processed in Gulf Coast refineries. Mexico already exports crude to the U.S., and the U.S. exports refined products to Latin America and elsewhere.

"They could buy this from Africa, but it makes more sense for them to buy light, sweet crude closer," Lipow said.

Steady steps

The export ban includes a few exceptions, such as allowing oil exports from Alaska. Exports of refined fuels, such as gasoline or diesel, are also allowed. In addition, the Commerce Department has approved crude oil exchanges with Canada, which has also enjoyed unfettered trade for years. Apart from a limited exchange of oil for the U.S. strategic reserve in the late 1990s, Mexico has not had access to U.S. oil.

The Commerce Department last year took several steps, within the existing rules, to ease overseas sales: first giving companies clearance to export some forms of super-light crude; and then issuing guidelines on what can be sold without a special permit.

Pemex and U.S. oil producers want the administration to grant Mexico the same status as enjoyed by Canada.

However, the one-year licenses for swaps with Mexico can be renewed or revoked, the official said, and all the oil covered by the exchanges must be refined at its destination, either in Mexico or the United States.

Companies involved in the trade with Mexico will also have to show that the same volumes of oil are being sold and bought.

"These are exchanges, so if a barrel goes out then a barrel goes in."

Experts said the move by the Commerce Department did not signal a desire to stretch the limits of the existing law.

"Today's announcement approving requests for oil swaps with Mexico, and rejecting applications for all other destinations, reflects a straightforward reading of Commerce Department regulations and should not be interpreted as a policy shift toward greater export liberalization," said Jason Bordoff, director of Columbia University's Center on Global Energy Policy.

—CNBC's Patti Domm contributed to this report.