BHP to test U.S. oil export ban by selling without formal ruling

By Catherine Ngai

(Reuters) - BHP Billiton Ltd (BHP.AX) is set to be the first company to export lightly processed ultra-light U.S. oil without explicit permission from the government, further testing the limits of an increasingly contentious ban on foreign sales.

Eight months after two other U.S. energy firms said they had received the first formal authorization to sell domestic condensate abroad, BHP said it had determined that its oil would also meet the legal criteria for export since it was being minimally processed in distillation towers in South Texas.

"We took the necessary time to thoroughly examine the issues involved and ensure that the processed condensate was eligible for export," said a spokesman for BHP, the Anglo-Australian mining firm that is also one of the largest producers in the Eagle Ford shale patch in Texas.

The Wall Street Journal, which first reported the exports, said the company had already contracted to sell a 650,000 barrel cargo to Switzerland-based Vitol, the world's largest independent oil trader. The BHP spokesman declined to discuss the volume, value or destination of the exports.

Vitol chief Ian Taylor told Reuters Commodities Summit this week European politicians should put pressure on Washington to end the crude oil export ban.

"There's no doubt there's going to be more and more lobbying for the free flow of crude oil," Taylor said. A Vitol spokeswoman declined to comment on Wednesday on the destination of the exports.

BHP's move comes as the U.S. mid-term elections put Republicans in control of both houses of Congress - an outcome many expect to hasten measures that would relax or end the ban on exporting crude, increasingly viewed as an outdated relic of the 1970s energy crisis.

Even so, the decision to press ahead with sales, despite the regulatory uncertainty, surprises many experts who had expected other companies to await clear rulings rather than risk a financial and reputational backlash.

"We had been skeptical that any company might self-classify processed condensate for export," Kevin Book, managing director of ClearView Energy Partners, said in a note.

He said doing so was always possible, but carried risks, even after the U.S. Commerce Department told Pioneer Natural Resource Co (PXD.N) and Enterprise Product Partners LP (EPD.N) in March that they could export processed condensate.

Just a few months after that decision, however, the Commerce Department placed an indefinite hold on some two dozen similar requests for so-called "commodity clarifications," frustrating producers that saw their rivals fetching higher prices abroad.

The recent fall in oil prices due to booming shale oil production has pushed U.S. crude (CLc1) to below $80 a barrel and is likely to sharpen pressure to ease the ban.

Pioneer said on Tuesday it had exported six cargoes of condensate from the Eagle Ford shale patch since July with "improved pricing" compared to domestic rates.

A spokesman for the Commerce Department could not be reached for comment.

"It remains to be seen whether another company will self-classify its processed condensate for export, but we would contend that the odds have increased in the wake of today’s news," said Book.

Many refiners in Asia, however, are skeptical about taking on such supply risks in the absence of a clear U.S. ruling.

"I don't think the U.S. government would like it, and even if such cargo is available, it will be hard to approach it," a Seoul-based refinery source said, speaking about BHP's plans and risks associated with buying condensate under those conditions.

A crude trader with another South Korean refiner said: "Even if they make contracts to do so, I don’t think actual cargoes will be delivered. Which refiner would take such a high risk if there was a prospect of no delivery?"

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U.S. law bans the export of crude oil, a legacy of the Arab oil embargoes in the 1970s. The United States does allow refined products such as gasoline and diesel to be shipped abroad.

In March, the Commerce Department confirmed to Pioneer and Enterprise in a private ruling that "processed condensate" - which has been run through a very simple form of refining - would qualify as a refined product, not raw crude.

"BHP Billiton has worked through a robust due diligence, secured a dedicated supply chain, and has taken steps to ensure the quality of our product for export. The processed condensate that BHP Billiton plans to export is not crude oil under BIS regulations," the spokesman said.

Early last month, BHP told Reuters in an email that it had submitted an application to classify its Eagle Ford processed condensate as eligible for export. The Journal said that some of the condensate recently exported by Enterprise had come from wells run by BHP, giving it insight into the process.

A spokesman for Senator Lisa Murkowski from Alaska, a leading proponent of exports, said BHP's move was "consistent with our understanding of Commerce Department regulations, which do not require a licence for export of a petroleum product."

BHP Billiton also has operations in the Permian in Texas, Haynesville shale in Louisiana and Fayetteville in Arkansas.

In light of the drop in U.S. gas prices since it first bought into the shale plays in 2011 for $20 billion, including debt, the company has been focusing on boosting output from its liquids-rich shale assets, targeting 200,000 barrels per day in 2017, and recently put its Fayetteville holdings up for sale.

Exxon Mobil Corp (XOM.N) and other oil companies have been asking that the ban on crude exports be scrapped, saying it would spur job creation and boost energy security by encouraging new investment that boosts production.

(Reporting by Catherine Ngai in New York and Ankush Sharma in Bangalore; Additional reporting by Timothy Gardner in Washington, Sonali Paul in Melbourne, Meeyoung Cho in Seoul and David Sheppard in London; Editing by Jonathan Leff, Andre Grenon, Lisa Shumaker, Tom Hogue and Keiron Henderson)