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U.S. Crude Oil Export Controls Rules, Commercial Opportunities and Planning

Energy Briefing Four Seasons Hotel

Houston, TX April 30, 2013

Jacob Dweck, Partner David Goldwyn, Of Counsel David McCullough, Associate Sutherland Asbill & Brennan LLP

About Sutherland’s Energy Practice

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Crude Oil Stockholders

Policy and Regulatory (Federal &

State)

Project Development and Finance

Commercial and Trading

Practice (Dodd Frank)

Energy Transactions

(M&A, Divestiture)

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Houston, Washington, New York, Austin, Atlanta

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About David Goldwyn

President Goldwyn Global Strategies, LLC www.goldwynstrategies.com

Special Envoy for International Energy Affairs (Department of State 2009-2011)

Assistant Secretary of Energy for International Affairs (1998-2001)

Senior Fellow, Brookings Institution (Non-resident)

Moderator, New Geopolitics of Petroleum and Natural Gas Discussion Series, Bipartisan Policy Center

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Of Counsel, Sutherland

Outline of Briefing

The Takeaways

North American crude production: facts and projections

Background and architecture of U.S. crude oil export controls

Export opportunities under current rules Export from U.S. to Canada Canadian crude exported through U.S. ports Export-for-import “swap” Export of condensate Export of product/crude blends Other permissible exports

Policy and politics affecting prospects for U.S. crude oil exports

Conditions, scenarios and prospects for limited liberalization of crude exports

Implications for crude transportation projects: trains, boats and pipelines

Questions and discussion

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Takeaways

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Takeaway: U.S. Crude Export Restrictions Affect North America as Single Market

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http://www.refinerlink.com/blog/North_American_Crude_Oil_Pipelines/

Takeaway: Some Commercial Opportunities Exist Under Current U.S. Export Rules

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Export of U.S. Crude/

Product Blends

“Swap” of U.S. Crude Export for

Import Export of Finished

and Unfinished Products

Export of (“Foreign”) Canadian Crude in Transit

through U.S.

Export of Finished

and Unfinished Products

Export of U.S. Origin Crude to Canada

Other Permissible

Exports Designated

in Rules

License Required No License Required License May Be Required

Takeaway: A Significant Lifting of U.S. Export Restrictions Is Very Unlikely During Obama Administration (and Beyond?)

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Crude oil exports are not an issue on policy or political agenda . . . No discussion

Tom Donilon, National Security Advisor to the President, speaking at Columbia University Center on Global Energy Policy, April 24, 2013

Takeaway: But Targeted Liberalization May Be Possible Given Right Approach, Conditions and Timing

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Widening price spread U.S. producers

challenged Gasoline pump prices

lower Geopolitical benefits

(Canada, Mexico) Congressional opposition

managed Effective industry

advocacy

Liberal interpretation of “swap” regulation

Crude trades with Mexico Exports to FTA countries Exports of (lease)

condensate Exports of limited

volumes and for limited period

Right Conditions Possible Scenarios

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North American Crude Production: Facts and Projections

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North American Crude and Liquids Production: The Boom and Projected Surplus

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Canadian Oil: Bound for U.S. Market

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http://www.neb.gc.ca/clf-nsi/archives/rpblctn/spchsndprsnttn/2009/nbprspctvtrndcndnlsppl/nbprspctvtrndcndnlsppl-eng.html

U.S. Light Crude Filling Domestic Demand

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Source: Deutsche Bank

U.S. Crude Supply and Demand: Displacing Imports

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Source: ESIA

North American Crude Production in Global Context: Changing the Flows

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Approximate NET Crude Flows 2012 to 2020 Million b/d

Source: ESIA

Crude Pricing: Significance of Prices and Price Relationships

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Crude Pricing: Isolating Potential Effects of Export Restrictions

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U.S. Becoming Major Oil Products Exporter

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Background and Architecture of U.S. Crude Oil Export Controls

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Crude Export Controls Rooted in Arab Oil Embargo: EPCA Enacted in 1975

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Executive Branch Calls the Shots on Oil Exports

President can allow crude exports if in the “national interest” Example: Exports to Canada

Some crude exports are allowed in EPCA or other laws, while others are specifically disallowed - examples: Yes: Exports of “foreign” crude oil

No: Crude from OCS

But President subject to congressional and political pressure

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to → to →

What is “Crude Oil”?

Mixture of hydrocarbons that Exists in liquid phase in

underground reservoirs and after surface separation and

Which had not been processed through a crude distillation tower

Includes lease condensate and liquid hydrocarbons produced from tar sands and oil shale

Does not include Plant condensate

Topped crude oil

Residual oil

Other finished and unfinished oils

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Crude Oil Licensing Regulations: “By the Book”

Administered by Bureau of Industry and Security (BIS) at Department of Commerce

Strict enforcement of restrictions and exceptions

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Crude Oil Export Licensing Process

Application process appears simple−but care is required

BIS encourages an informal notification of an incoming application, particularly if unique issues are involved

Application submitted online through BIS website – https://snapr.bis.doc.gov/snapr/

Specific requirements and documentation depend on the basis for the license

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− to −

Use of License

Export only by licensed party – license non-transferable Facilitating back-to-back

transactions may be allowed

Sales only to purchasers and destinations identified on license But can list many

Restrictions on use of exported crude may apply e.g., exports for “use or

consumption” to Canada

Process for modifying license

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Enforcement and Penalties

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Export controls strictly enforced

Compliance programs and audits

Potentially severe penalties Civil Penalties: Not to exceed the

greater of $250,000 or twice the value of the transaction.

Criminal Penalties: (1) Up to the greater of $1,000,000 or 5 times the value of the transaction; and (2) 10 years imprisonment.

Additional Penalties: Denial of export privileges and seizure/forfeiture of goods.

Voluntary disclosure process

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Export Opportunities Under Current Rules

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Export Opportunities Discussed

Exports from U.S. to Canada

Canadian crude exported through U.S. ports

Export of condensate

Export-for-import “swap”

Export of product/crude and blends

Other permissible exports

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Export to Canada: The Rules

No restrictions on volumes or modes of transport

No restrictions on buyers (but must be identified)

U.S. crude must be used or consumed in Canada Re-export from Canada is prohibited, even as part of blend with Canadian

crude

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Exports to Canada: The Opportunities

U.S. crude delivered by pipeline to Western Canadian refineries and by rail to Eastern Canadian refineries

Export of condensate to be used as diluent in heavy oil

U.S. light crude delivered by vessel from Gulf Coast to refineries in maritime provinces (no Jones Act issue)

Export Allowed from Canada of “displaced” Canadian light crude and products refined from U.S. crude

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Export of “Foreign” Crude: The Rules

Law authorizes export from U.S. of “foreign” crude oil that has not been mixed with any U.S.-origin crude Documentary proof of segregation

from time of entry into U.S. to export from U.S.

Minimal comingling as a result of shared pipelines and storage tanks may be acceptable

Possible benefits of compliance with U.S. Customs (CBP) requirements for “bonded” facility or merchandise Pipelines

Rail

Terminals

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Export of Canadian Crude: The Opportunities

Export of Canadian crude transported by pipeline from production areas to ports in Gulf of Mexico

Exports of Canadian crude transported by rail to ports in the Gulf and West Coasts of U.S.

Combination of pipeline and rail

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Swap Export for Import: The Rule

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“Overall Transaction”

EXPORT IMPORT

Exported crude cannot be reasonably marketed in U.S. for “compelling” economic or technological reasons “result

directly”

Import of equal or greater quantity and equal or better quality of crude oil

or Import of petroleum products that is no less than would be derived by refining the exported crude oil

U.S. Foreign

Swap Export for Import: Issues With the Opportunities

Under what circumstances can crude not be marketed in U.S. for “compelling” economic reasons? At what point is price differential “compelling”?

Anything short of a showing that the crude would not be produced were it not for export market?

How would export “directly result” in higher valued import? Documenting that export and import are part of same “overall

transaction”?

How are values of exported crude and related imports determined?

Same stakeholder (exporter/importer)?

Can export and import be to two different geographic markets?

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Export of What Type of Condensate: The Rules

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Light hydrocarbons that liquefy at atmospheric pressures and temperatures at the wellhead or are only liquid product at gas processing plant

License Required

Lease condensate (“raw” condensate)

License Not Required

Plant Condensate (natural gasoline)

Drip Gas (from natural gas pipelines)

Naphtas (produced in refineries)

Exporting Condensate: Potential Uses

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Exporting Condensate: The Opportunities

No license required for export of plant condensate

Export of lease condensate for use as diluent for Canadian heavy oil (“dilbit”) Issue: Does use render dilbit non-foreign when imported to U.S.?

Export of lease condensate as “product” after blending

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Export of Products Exploded: No License Required

Mini refineries are reportedly processing light crude just enough to qualify output as refined products

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htt/p://www.bloomberg.com/news/2013-02-26/crude-export-ban-no-match-for-lightest-u-a-

The Flint Hills oil refinery in Corpus Christi, Texas. A boom in shale oil production has the industry finding ways to export the oil.

Crude Export Ban No Match for Lightest U.S. Shale Oil, Feb. 26, 2013

Export of Product/Crude Blends: The Interpretation and the Opportunity

No explicit rule whether export of crude/product blend requires a license

Informal interpretation that crude/product blend can be exported as product if it is in fact transported, marketed and used as product

Can blend lighter crudes with refined oils to produce Bunker fuel Fuel oil Gasoline Blendstock for the above

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Other Permissible Exports: The Rules But Few Opportunities

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Opportunities Alaska Cook Inlet

Strategic Petroleum Reserve Exchange Must directly result in importation of refined products needed in the U.S.

Heavy California Crude Gravity of 20 degrees API or lower

Only 90 day export license

Restricted Crude: Outer Continental Shelf Crude

Naval Petroleum Reserve Crude

Trans-Alaskan Pipeline Crude Not to exceed 50,000 bbls per day

Very Restricted shipping routes and shipping procedures

Mineral Leasing Act Pipeline Crude

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Policy and Politics Affecting Prospects for U.S. Crude Oil Exports

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Geopolitical Benefits Focus on Oil Boom−Not U.S. Exports Policy

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U.S. “energy independence” Lower energy costs for U.S. economy

The debate over LNG exports

Geopolitical considerations (Middle East, China, Russia)

Politics and Stakeholders: No Opening for Wholesale Liberalization of Crude Exports

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Conditions, Scenarios and Prospects for Limited Liberalization of Crude Export Controls

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Conditions for Improving Export Prospects (When?)

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Targeted and Unified Advocacy making the scope

Scenario would not impact U.S. crude supply or price

Lower gasoline prices

Shut-in production

In Bakken

Surgical Exports

Possible Limited Export Scenarios

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Liberal interpretation of “swap” regulation

Crude trades with Mexico

Exports to FTA countries

Exports of (lease) condensate

Exports of limited volumes of light crude and for a limited period

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Implications for Crude Transportation Projects: Trains, Boats and Pipelines

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A Follow-On Topic for Another Day

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June 6

U.S. Export Rules and Keystone XL

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U.S. Export Rules and Keystone XL (II)

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Questions and Discussion

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Thank you

Jacob Dweck, Partner 202.383.0775

Jacob.Dweck@Sutherland.com David McCullough, Associate

202.383.0853 David.McCullough@Sutherland.com

SUTHERLAND ASBILL & BRENNAN LLP

www.sutherland.com

David Goldwyn Of Counsel, Sutherland

202.696.1420 David.Goldwyn@Sutherland.com

Principal, Goldwyn Global Strategies, LLC dgoldwyn@goldwynstrategies.com

www.goldwynstrategies.com

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