BP Splitter Refinery Seen Skirting U.S. Oil Export Ban

The oil industry is pressuring President Barack Obama to end the 41-year-old ban on most crude exports. BP Plc (BP/) isn’t waiting for a decision.

The British oil giant has signed on to take at least 80 percent of the capacity of a new $360 million mini-refinery in Houston that will process crude just enough to escape restrictions on sales outside the country.

Amid a flood of new U.S. oil, the demand for simple, one-step plants capable of transforming raw crude into exportable products such as propane is feeding a construction boom along the Gulf Coast. If the new processing units continue to multiply, they could render moot the politically sensitive debate over whether to ease the restrictions in place since the Arab oil embargo of 1973.

“It’s a relatively inexpensive way around the export prohibition,” said Judith Dwarkin, chief energy economist for ITG Investment Research Inc. “You can lightly ruffle the hydrocarbons and they are considered processed and then they aren’t subject to the ban.”

Rethinking the Ban on Exporting U.S. Oil

BP and other producers will also be able to sell the lightly refined products to a variety of domestic markets.

The first of the units, built by Kinder Morgan Energy Partners LP (KMP) for use by BP, is scheduled to come online in July. Three additional plants have been proposed by other pipeline or trading companies, and refiners including Valero (VLO) Energy Corp. and Phillips 66 said they may follow suit. The plants, built for 1/10 the cost of a complex, full-scale refinery, take advantage of the law that allows products refined from oil to be sold overseas, though not the raw crude itself without rarely granted government permission.

BP Plc has signed on to take at least 80 percent of the capacity of a new $360 million mini-refinery in Houston that will process crude just enough to escape restrictions on sales outside the country. Photographer Matthew Lloyd/Bloomberg Close

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BP Plc has signed on to take at least 80 percent of the capacity of a new $360 million mini-refinery in Houston that will process crude just enough to escape restrictions on sales outside the country. Photographer Matthew Lloyd/Bloomberg

Gasoline Prices

Supporters of the export ban say keeping U.S.-produced oil at home helps lower fuel prices for industry and consumers. Building enough mini-refineries designed for export could have the opposite effect, said Daniel Weiss, a senior fellow at the Center for American Progress, which supports the limits.

“It could be a way of getting around the oil ban and therefore could have an impact on the price at the pump,” he said.

Kinder Morgan, run by billionaire Chief Executive officer Richard Kinder, expects to open the first phase of its 100,000 barrel-a-day crude processing plant in July, located along the Houston Ship Channel. BP has signed a 10-year contract to use the facility, which is designed for further expansion.

Photographer: Tim Rue/Bloomberg

Kinder Morgan Energy Partners LP, run by billionaire Chief Executive officer Richard Kinder, expects to open the first phase of its 100,000 barrel-a-day crude processing plant in July, located along the Houston Ship Channel. Close

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Photographer: Tim Rue/Bloomberg

Kinder Morgan Energy Partners LP, run by billionaire Chief Executive officer Richard Kinder, expects to open the first phase of its 100,000 barrel-a-day crude processing plant in July, located along the Houston Ship Channel.

“The export of refined products is increasingly in vogue,” Rich Kinder told analysts on a Jan. 15 conference call for the Houston-based company. “We’ll be able to continue to benefit from what we see is a significant trend.”

Creating Value

Kinder Morgan’s plant is designed to help BP in “creating more valuable products or getting to where we could export,” said Ronald McClain, the company’s president of products pipelines.

“BP complies with all federal regulations regarding imports and exports,” Scott Dean, a spokesman for BP, said in an e-mail response.

BP’s American depositary receipts fell three cents to $48.79 and shares of Kinder Morgan Inc. rose 0.3 percent to $32.29 at the close in New York.

The company has the ability on its pipeline network to sell products from the Kinder Morgan plant both inside the U.S. and for export. BP lost its access to Gulf Coast markets when it sold its 450,000 barrel-a-day refinery in Texas City, Texas, to Marathon Petroleum Corp. last year. The new plant can help the company serve some of those customers.

Oil Glut

For producers such as BP and ConocoPhillips, the plants help solve one of the more vexing challenges of newly abundant oil in the U.S.: the more they produce, the cheaper it gets. That’s because of energy policies that prevent them from selling their crude to overseas markets, while applying no such limits to products that are processed in refineries, such as gasoline or diesel.

Source: Kinder Morgan Energy Partners LP via Bloomberg

The plants, built for 1/10 the cost of a complex, full-scale refinery, take advantage of the law that allows products refined from oil to be sold overseas, though not the raw crude itself without rarely granted government permission. Close

The plants, built for 1/10 the cost of a complex, full-scale refinery, take advantage... Read More

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Source: Kinder Morgan Energy Partners LP via Bloomberg

The plants, built for 1/10 the cost of a complex, full-scale refinery, take advantage of the law that allows products refined from oil to be sold overseas, though not the raw crude itself without rarely granted government permission.

The result is that refiners so far have reaped the greatest rewards of the U.S. oil renaissance, exporting record amounts of gasoline while the drillers who created the boom have been forced to contend with a glut of unrefined oil and depressed prices. New discoveries and advanced drilling techniques helped produce more than 1 million barrels last year of a purer, lightweight oil that’s closer to gasoline than darker, heavier crudes. Production of the light oil, known as condensate, doubled from 2011, according to RBN Energy LLC.

New Splitters

The glut, in turn, is leading producers to turn to the new plants, called splitters because they split off gassy molecules in a distillation process that is far less complex than that of a typical refinery. The tower-like facilities can turn the condensate into liquid fuels such as kerosene, propane, butane, and naphtha, an ingredient in gasoline.

Refiners including Valero and pipeline operators including Magellan Midstream Partners LP have so far discussed plans for a dozen such plants, with the total potential to process more than 460,000 barrels of condensate a day -- almost half last year’s production, according to a Feb. 5 note from analysts at RBC Capital Markets led by Leo Mariani.

“The international buyers of these products will likely need to refine them further, so this is basically a veiled form of condensate exports,” wrote Mariani, who’s based in Austin, Texas.

To contact the reporters on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net; Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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