World Oil Prices Drop 10% as USA Starts Oil Exports


The oil tanker BW Zambesi  Shipping Crude Oil from USA to South Korea

The oil tanker BW Zambesi Ships Crude Oil from USA to South Korea

The United States of America has started exporting Oil. Technological advances have transformed the world’s largest economy into a major oil producer, enabling it to start oil exports banned in the 1970s to protect reserves.

China, on the other hand, the world’s second largest economy has also intensified its search for off-shore oil in its territorial waters, according to the American business publication, Wall Street Journal. The Organization of Petroleum Exporting Countries (OPEC) which had traditionally used oil for political leverage against the western world, the USA in particular is set to be rendered toothless.

The United States exported crude oil  to South Korea on Wednesday, July 30, 2014, effectively ending a half-century ban on selling American crude oil abroad, opening the door for a radical transformation of the world economy, Wall Street Journal has reported.

The French News Agency, AFP has reported this first week of August, 2014, that world oil prices have dropped markedly as recent worries over potential disruptions from conflicts in the Middle East and Ukraine continue to ebb.

In New York, the US benchmark West Texas Intermediate (WTI) for September delivery slid US29c on Friday to $US97.88 a barrel. Brent crude for September was down $US1.18 at $US104.81 in London trade. Prices were nearly 10 per cent off their highs of late June, and back to where they stood at the beginning of May.

“The last couple of days showed that we continue to shed some of the speculation in the market that was built into what pushed us to nine month highs,” Gene McGillian of Tradition Energy said. “Some of the fears that we were going to have a supply disruption in global markets seem to have been wiped away.”

The BW Zambesi, a Singaporean tanker, set sail from Texas headed for South Korea late Wednesday night [July 30, 2014], carrying some $40 million worth of American crude oil.

The shipment seems small in the scale of the global energy market, but it could have momentous consequences.

The U.S. had not exported crude since the 1970s, when an embargo led by the Arab members of the Organization of Petroleum Exporting Countries (OPEC) pushed gasoline prices to unsustainable levels. The embargo prompted Congress to pass a law forbidding the overseas sale of American oil. The US has numerous oil fields, including those visible in California and the area of Wichita Falls, northern Texas. The US is also known to preserve massive imported reservoirs of crude oil in the ground.

Oil Rig  in Wichita Falls, Texas (1965 Internet Photo)

Oil Rig in Wichita Falls, Texas

The export ban was instituted at a time when U.S. oil production was in steep decline. But now, the opposite is true.

Part of the reason why the export ban made sense when it was instructed is that, at the time, the U.S. did not have a lot of oil. The scarcity of domestic crude made America dependent on oil-rich nations, many of whom were displeased about U.S. involvement in the Yom Kipur war between Israel, Egypt, and Syria.

But new technologies have made it possible to extract oil from places where nobody would have thought to look in the 1970s. Hydraulic fracturing, or ‘fracking,’ injects water and chemicals into the ground at very high pressures, literarily extracting oil and natural gas from rocks.

The U.S. has large deposits of the kind of rocks that contain oil. The two biggest deposits are located in Eagle Ford, Texas, and Bakken, North Dakota. These fields have helped U.S. oil production grow by nearly 50% in just three years. America is now well on its way to becoming the world’s biggest oil producer, outstripping giants such as Saudi Arabia.

An Oil Field in California

An Oil Field in California

This increase of production could have huge political consequences, as the U.S. becomes less and less dependent on foreign oil and gas, much of which comes from volatile regions where America has few friends — i.e. Iran, Venezuela, and Russia.  But The environmental consequences of fracking are not clear, and many people worry that they could be disastrous.

What is more, the sudden surplus of oil could also hurt the U.S. economy. In what may be the ultimate first world problem, having too much oil can push prices so low that drilling for it is simply not worth it anymore. For that reason — and because they can make huge profits by selling American oil in places where crude is scarce, such as South Korea — oil companies have been lobbying the government to allow them to sell domestic crude abroad.

The export ban technically remains in place today. But companies have figured out a loophole that allows them to sell some of the excess U.S. oil abroad. The law only forbids exports of crude oil, allowing the sale of refined products such as gasoline or diesel. To take advantage of that provision, oil companies are doing minimal processing on their shale oil, and arguing that it counts as “fuel.”

They are able to make this claim because shale oil tends to be more volatile than regular crude, which means that it is closer to gasoline. Only time will tell whether U.S. oil exports take off in earnest. But if they do, that little Singaporean tanker will have quietly made history.

Oil refinery in Texas

Oil refinery in Texas

In the meantime, China is accelerating the expansion of its offshore oil fleet—and adding coast guard vessels to protect it—as it ventures farther into the sea for energy resources, threatening more altercations with neighbors.

Chinese companies from the giant China National Offshore Oil Corp. to small services providers have ordered more ships and rigs for offshore exploration in the first half of this year than in any full year since 2010, with more on the way, according to data compiled by IHS Maritime. In addition, China ordered a massive, 30,000-ton deep-water drilling rig last year that is designed to operate in the South China Sea, and has two more in the planning stage.

These new rigs will be as big as China’s largest—the HYSY 981—whose deployment in waters also claimed by Hanoi prompted a two-month nautical standoff and deadly anti-China riots in Vietnam. The rig was moved from the disputed area in mid-July, but with no end to tensions, as both nations reasserted their rights to the territory.

Driving the push to build the fleet is China’s huge demand for energy, and—particularly for Cnooc, the country’s primary offshore oil producer—a quest for new finds to replace stagnating production in maturing fields.

The growth will give China the ability to explore and plant its flag over broad claims that include nearly all of the South China Sea, where large areas remain untapped under deep waters, harsh conditions and territorial disputes.

The expansion of the fleet is part of national policy, in a region where Beijing’s political and energy-security goals overlap, said Philip Andrews-Speed, an energy-security specialist at Singapore’s Energy Studies Institute.  “I’m sure they are going to use these drilling rigs as a political statement as well as simple exploration,” he said.

China’s emerging strategy was on display when the massive HYSY 981 rig was moved into deep, contested waters off the Paracel islands. The rig was accompanied by dozens of ships, mainly tugs, support ships, fishing boats and coast-guard vessels, according to IHS Maritime analyst Gary Li.

Drilling in deep waters is in line with global trends in which more easily extractable reserves have been depleted and energy companies are being forced into remote, sometimes politically tricky regions. A major deep-water discovery could have the same transformational effect for China’s energy security that the shale boom had on the U.S. energy sector.

Spearheading the effort is Cnooc Ltd. and its sister company China Oilfield Services Ltd., or COSL, which owns and operates many of the vessels. Cnooc’s domestic oil-and-gas output has changed little in the past four years, and the company said in 2009 that it would commit $30 billion to deep-water projects over 20 years.

A Cnooc spokeswoman declined to comment when asked if the new fleet could come into conflict with China’s neighbors, and said the company has been following an exploration plan it announced this year. She referred further questions about new vessels to COSL.

COSL will provide an update on its fleet and orders when it reports its earnings in August, a company spokeswoman said, also declining to comment about potential territorial conflict. COSL, the world’s largest state-run offshore-drilling company, has been accumulating deep-water drilling expertise in the North Sea, Gulf of Mexico and Indonesia.

Chinese orders for ships and rigs in the first half of this year total 126,300 tons, covering a range of vessels needed for large-scale offshore operations, including drilling platforms for shallow- and mid-water, ships that conduct seismic research in deep water and support vessels, according to IHS Maritime.

A parallel effort is taking place with China’s coast guard, which was reorganized last year to include coastal police, fisheries and marine-enforcement agencies under one unified command. The fleet, which numbers more than 100 vessels, has around 40 ships on order and is expected to receive 15 this year, according to IHS.

The aim of the revamp is to boost maritime law enforcement, improve the protection of oceanic resources and better safeguard the country’s maritime rights and interests, China’s official Xinhua News Agency reported in March.

While the East China Sea, where China is locked in disputes with Japan, is also likely to see more exploration, the South China Sea is expected to draw most of the effort because of its potential for huge reserves.

The U.S. Energy Information Administration’s high-end estimate puts the South China Sea’s proved and probable reserves at 11 billion barrels of oil and 190 trillion cubic feet of natural gas. This compares to a low-end estimate of 48 billion barrels of undiscovered oil resources and around 740 trillion cubic feet of undiscovered natural gas in all the Asian-Pacific region, according to the U.S. Geological Survey.

Recent discoveries have indicated that the region may hold more gas than oil, and exploration in deep waters faces tremendous logistical and technological hurdles.

The new abilities should allow China to venture much farther into the South China Sea than before and surpass the reach of neighbors such as Vietnam and Philippines, which rely heavily on foreign expertise, according to Mr. Andrews-Speed.

COSL’s new mega drilling rig, the HYSY 982, is expected to be completed by 2016 and is specifically designed to operate in the South China Sea, according to its designer, Norway-based Agility Projects, and its builder, Dalian Shipbuilding Industry Co. There, rigs must be able to drill at depths of 5,000 feet or more and withstand rough seas and typhoons, they said.

“This is only the start of a major, concerted Chinese drive towards harnessing the natural resources in the South China Sea,” Mr. Li said.