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Pass the dictionary: US gets in muddle over oil exports

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LONDON, July 29 (Reuters) - Somewhere in an office at the Bureau of Industry and Security (BIS) in Washington, D.C., a mid-ranking government official is sitting down with a stack of dictionaries.

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Coming up with a workable definition of "distillation" has become urgent as U.S. companies seek permission to export condensate, which has been stabilized and minimally distilled to remove the most volatile components.

Earlier this year, the bureau confirmed that it would not classify stabilized and minimally distilled condensate as crude oil - clearing the way for the condensate to be sent abroad under laws that permit the export of refined fuels but not raw crude.

The findings were issued in response to letters from Enterprise Products Partners and Pioneer Natural Resources that asked how the bureau would classify condensates that had undergone some basic processing at facilities operated by the two companies.

Private letter rulings, as the advisory opinions are known, do not create government policy or change the law. Instead they interpret how existing law applies to the specific set of facts outlined in the original request letters.

But the advisory opinions issued to Enterprise and Pioneer sparked a rush from other would-be exporters to obtain rulings on how their own stabilized and minimally processed condensates would be classified.

The potential cascade of private letter rulings threatened a wholesale reinterpretation and relaxation of the regulations, at a time when the White House and Congress have yet to decide whether to ease a four-decade ban on crude oil exports.

So now, the BIS has informed correspondents it will not be issuing any more opinions until it has had time to consider its position further and potentially develop comprehensive guidance, as Reuters reported on Monday ("U.S. condensate oil export requests put on hold for now" July 28).

But coming up with a rational and consistent approach that can withstand judicial scrutiny is likely to prove difficult. It would be more sensible for the administration to admit defeat and lift the export ban entirely, but that decision would have to come from the White House.

DISTILLATION TEST

In simplified terms, the regulations require an export license for crude oil but not refined products. The crucial question is how to differentiate between products and crude. For this purpose the government has adopted a distillation test:

"Crude oil is defined as a mixture of hydrocarbons that existed in liquid phase in underground reservoirs and remains liquid at atmospheric pressure after passing through surface-separating facilities and which has not been processed through a crude oil distillation tower," the regulations state (15 CFR 754.2(a)).

The question then becomes how to define "distillation" and "crude oil distillation tower".

Most dictionaries define distillation as a process that involves boiling and then condensing a mixture to separate out different components based on their differing boiling points.

The Webster dictionary calls distillation "the process of first heating a mixture to separate the more volatile from the less volatile parts, then cooling and condensing the resulting vapor so as to produce a more nearly pure or refined substance".

The principal components of the definition (evaporation, condensation, separation by boiling point) are common to every major English dictionary.

REFINERY TOWER

In an oil refinery, primary distillation occurs in a crude distillation tower, also known as a crude distillation unit or an atmospheric distillation unit.

Hot crude oil is fed into the distillation tower. The most volatile components vaporize and rise up through a stack of bubble trays, where they condense and can be drawn off.

Different components will condense on different trays, depending on their precise boiling point, with liquids that boil at lower temperatures condensing on trays higher up the tower.

While a typical distillation tower may contain up to 40 or 50 bubble trays, the off-take is usually grouped into some half a dozen broad "cuts" to be sent for further processing.

The number of bubble trays and cuts in the crude distillation tower is somewhat arbitrary and depends on engineering and commercial convenience, rather than any special chemical properties of the oil or the refined products.

STABILIZATION UNIT

The problem is that the condensates that Enterprise and Pioneer have won permission to export and that other firms want to export have not passed through an oil refinery's distillation tower but through another type of processing unit called a "condensate stabilizer".

Condensates are effectively stabilized in much the same way by heating a mixture of very light oils, running them through a tower with a set of trays and separating them out depending on differences in their boiling points.

Pioneer and Enterprise operate advanced, large-scale stabilization units that look a lot like small oil refineries. Most fractionation units and condensate stabilizers are smaller and simpler.

Condensate stabilizers and crude distillation towers are obviously very different pieces of equipment - until the differences have to be defined, and then it becomes much harder to distinguish between them sensibly.

This probably explains why the Bureau of Industry and Security originally ruled that the condensates exported by Enterprise and Pioneer were no longer crude oil because they had been through a distillation/stabilization process.

But once it admitted that any separation through vaporizing and condensing qualifies as distillation and readies raw oil for export, it was not clear where the bureau could draw the line. The floodgates for condensate exports would open, and in time for minimally processed crude oil too. So the bureau is rethinking its position.

JUDICIAL REVIEW

At this point, if it wants to save the export regulations, the bureau needs more sophisticated definitions of crude, refined products and distillation that will also withstand scrutiny in the U.S. courts.

Under the Administrative Procedure Act, the federal courts can invalidate any regulation that is "arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law". (5 USC 706(2)(A))

Courts generally take a dim view of agencies that try to make the rules up as they go along. So the bureau needs to come up with definitions that can be applied fairly and consistently to all oil and condensate producers and refiners, otherwise its definitions and decisions risk being struck down.

The bureau has already stated it believes the stabilization and processing employed by Enterprise and Pioneer meet the standard required by the regulations, which complicates matters even further.

The bureau now has three basic options:

(1) it can withdraw the opinions issued to Enterprise and Pioneer and explain why they were wrong (risking a court challenge from the two companies);

(2) apply the same logic to other companies in the same circumstances (leading to a large volume of exports and undermining the intention of the rules); or

(3) find a rational way to distinguish between the sort of stabilizing and processing that Enterprise and Pioneer are doing and the stabilization processes employed by other firms (which will require some careful definitions).

More radically, the bureau could abandon the distillation test altogether and put some other test in its place, or supplement it with additional rules designed to allow some forms of distillation but not others. However, any new test must still pass the rationality and fairness requirements.

In the meantime, someone in the bureau is sitting with a big pile of dictionaries and books on industrial chemistry trying to work out a rational and legally defensible way forward.

Good luck to them.

---

By John Kemp

(The opinions expressed here are those of the author, a columnist for Reuters.)

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