Since last summer, there has been considerable uncertainty regarding how to classify lease condensate that has undergone some processing for export control purposes. To address this issue, the Department of Commerce’s Bureau of Industry and Security (BIS) recently issued a Frequently Asked Questions (FAQ) guide discussing the difference between lease condensate and liquid hydrocarbons considered to be “crude oil” subject to stringent export requirements and those considered to be processed “petroleum products” that typically can be freely exported.
The Export Administration Regulations’ (EAR) definition of “crude oil” includes lease condensate and liquid hydrocarbons produced from tar sands, gilsonite, and oil shale that have not been processed through a crude oil distillation tower. Crude oil is subject to the EAR’s Short Supply controls, and therefore a BIS license is required to export crude oil to all destinations. Petroleum products, on the other hand, typically can be exported to most destinations without a license, unless they have been produced or derived from the Naval Petroleum Reserve.
In the FAQ guide, BIS notes that there must be “material processing” through a crude oil distillation tower in order for a product to qualify as a “petroleum product” under the EAR. BIS states that simply processing crude oil through equipment that utilizes pressure reduction alone to separate vapors from liquid or pressure changes at a uniform temperature (e.g., flash drums with heater treaters or separators) does not transform the crude oil into a petroleum product.
Some of the factors that BIS will consider when determining whether a product has been materially processed through a crude oil distillation tower and thus qualifies as a petroleum product include:
- Whether the distillation process materially transforms the crude oil, by using heat to induce evaporation and condensation, into liquid streams that are chemically distinct from the crude oil input.
- The change in API gravity between the input and the output of the process.
- The change in percentage of different types of hydrocarbons between the input and the output of the process.
- Whether the streams resulting from distillation have purposes besides simply allowing the product to be classified as an exportable petroleum product (e.g., petrochemical feedstock, diluent, gasoline blendstock).
- Whether the distillation process utilizes temperature gradients and has significant internal structures (e.g., trays or packing) and differentiated output streams.
- Whether the distillation uses towers with more mechanical complexity and heat, higher residence time, internal structures that promote condensation and better separation, and consistent quality liquid streams (i.e., cuts or fractions) than equipment used to separate vapors and liquids for transportation needs.
While BIS notes that these factors are not exhaustive, they at least provide industry with some guideposts and understanding of BIS’s decision-making process going forward.
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