Fifty Shades of Blending – Could Condensate be the “Tiger in Your Tank”? (April Fool)

The start of April marks the traditional summer driving season. Domestic demand for gasoline is waning due to renewable fuels and higher fuel economy standards. At the same time the tight oil shale revolution is delivering greater volumes of lighter sweeter crudes to US refineries – including condensates. Those light crudes produce more gasoline when refined but can cause problems for refineries not configured to handle them. Today we describe a revolutionary process that could potentially bypass refinery distillation.

Check out Kyle Cooper’s weekly view of natural gas markets at http://www.rbnenergy.com/markets/kyle-cooper

There is much uncertainty about the volume of condensates being produced in the Eagle Ford, Granite Wash and other super light basins. In a recent blog about condensate production in the Eagle Ford basin we estimated US condensate production at over 1 MMb/d (see Don’t Let Your Crude Oils Grow Up to be Condensate). In the same posting we pointed out discrepancies in State and Federal reporting of condensate production related to its density measured in API degrees gravity. Reports from the field suggest condensate volumes are far higher than statistics indicate.

Some of the confusion arises because of the fine line between condensate and crude oil and poor definitions about what condensate is (see Fifty Shades of Condensate – Which One Did You Mean?). The volumes of condensate moving out of the Eagle Ford in South Texas to Gulf Coast refineries – by pipeline to Houston or by pipeline and barge to Corpus Christi, TX and St James, LAV are hard to track because shippers prefer to define everything as crude oil.

We have explored various end market destinations for condensate. We know that field condensate volumes cannot be exported in their raw form (see Fifty Shades Lighter – the Export Problem). We know that there is a growing market for condensate to be used as diluent to blend with heavy Canadian bitumen crude – a mixture called “dilbit” – and that volumes of condensate are moving to Western Canada for that purpose (see Fifty Shades of Eh?).

However there remain nagging doubts in analyst’s minds as to where all the new volumes of condensate – particularly those coming into the Houston area, are actually ending up. There have been announcements about condensate splitter projects such as the Kinder Morgan facility on the Houston Ship Channel but that will not commence operations until 2014. Some condensate has been blended with heavier crudes but we know that refiners have been reluctant to mess with this very light hydrocarbon.

In our second blog for today, contributor Vince Kaminski, known and respected as the father of energy market fundamentals reports on his recent experience with the Pathfinders tribes of Nrge Land.  Dr. Kaminski documents this tribe’s trials and tribulations at the hands of dominant castes, discusses how a shrinking pool of virgins represents one of the most serious threats to the future prosperity of Nrge Land, and explains how some Pathfinders have chosen to defect and establish new settlements surrounded by high and sharp hedges.  In this missive, “The Pathfinder Tribes of the Nrge Land” we’ll also learn something about how energy trading organizations really function.

Last week we learned something that can perhaps help to explain what is happening to at least some of those condensate volumes. It turns out that quite significant condensate volumes are being consumed in a closely guarded initiative by an as-yet unnamed gasoline marketer in the Houston area. Last week petroleum-marketing consultant Bracewell and Company released a private multi-client study to a limited subscriber audience describing the process – that has been patented by the company involved. Although RBN Energy was not on the report subscriber list, lets just say we know a company that was. The report is titled  “Downstream Blending Market for U.S. Condensates” and it describes an experimental process underway at a large Houston gasoline blending terminal.

According to the report the process involves the gasoline marketer blending certain forms of condensate directly into wholesale rack terminal gasoline supplies. “Rack” terminals are the wholesale distribution centers typically located along refined products pipelines at receipt points near to population centers. The term “rack” refers to the tollbooth like structures supporting overhead hoses that rapidly load the tank trucks that carry product to retail gas stations (see picture below).

Source: Google Images (Click to Enlarge)

Although most refined product delivered to rack terminals is shipped via pipeline from refineries, certain additives and supplemental products are blended into the final gasoline delivered to retailers using on-site blending equipment at the rack. We previously covered how this is done for butane (see “Wasted Away in Butaneville”). Another final blend stock mixed with gasoline at the rack terminal is ethanol. That is added to meet Renewable Fuel Standard (RFS) mandates (see Will RIN and Stimpy Dodge the Ethanol Blend Wall). These final blending additions are carried out at wholesale terminals for a couple of reasons. First because the Environmental Protection Agency (EPA) gasoline quality regulations differ nationwide depending on local pollution levels, climate and season – meaning different gasoline blends are required in every market. Second the ethanol that now makes up 10 percent of gasoline cannot be transported by pipeline since it attracts water in-transit, so it has to be separately transported to the rack terminal and blended into gasoline there.

To this carefully calibrated cocktail of refined gasoline, ethanol and butane the secretive Houston marketer is now apparently adding condensate. Or rather “light condensate” – above 65 API degrees of gravity - according to the Bracewell report.

We saw a copy of the executive summary of the report this past Friday and learned a little of the thinking behind this condensate blending process that could revolutionize retail gasoline in the US market. Of course it is early days yet and the technology is still being experimented with but what follows is the gist of the process.

It turns out that some of the condensates being produced in the South Texas Eagle Ford basin are so clean and light that they are suitable for final blending into gasoline after undergoing a very simple stabilization process. That simple process yields a blend stock that can be directly combined with basic refinery gasoline (called reformulated blendstock for oxygenate blending or RBOB) and ethanol to make an 87 octane material suitable for autos. Up to 10 percent of this stabilized condensate material can be added to gasoline in this way. The net return for gasoline blenders can be seen immediately from the chart below. The red line is the CME Gulf Coast gasoline price and the blue line is the estimated price of Eagle Ford condensate based on a discount of $25/Bbl to Gulf Coast Light Louisiana Sweet (LLS) crude. The cost of condensate on average over the past year has been $34/Bbl less than gasoline or about 80 cnts/gal – making the blending process very profitable.

Source: CME data from Morningstar (Click to Enlarge)

How does the stabilization process work?  The report published last week does not go into detail for commercial reasons. However it does indicate that stabilization involves “settling” of the lease condensate during truck and/or rail tank car transit from the wellhead stabilization unit to the rack terminal. The “settling” process occurs as the heavier condensate sinks to the bottom of the vessel.  Some of the light ends boil off to the atmosphere while those that remain in the tank can be processed as natural gas liquids.  At journeys end up to 88 percent of the truck or rail tank car contents can be removed through the top of the vessel by hose and added to a condensate-blending tank at the rack terminal. Operators use an Endress Hauser mass flow meter with an iPad software App to calculate flowing density, temperature density and temperature corrected volume as the condensate is unloaded.  After the condensate has been removed, remaining light ends are captured as y-grade and moved to gas processing plants.

We don’t pretend to understand the detailed process but the developer claims (according to the Bracewell report) that the resulting gasoline blend improves the performance of gasoline engines noticeably. That is because the slightly heavier condensate produces a “richer gasoline” that is clean burning, provides better acceleration and improves mileage.  The theory is that the gasoline molecules in condensate burn better because they have not been subjected to the stress of the refining process.  The developer is said to be experimenting with blend percentages higher than 10%, perhaps as much as 20%

As you might expect, we’ve heard that refiners are quite worried about this development.  They are concerned that the refinery sector could lose market share to oil and gas producers who completely bypass the petroleum refining process – going straight from wellhead to gas tank.  That truly will be a ‘Tiger in the Tank’ for the refinery sector.   If this “game changer” advance in gasoline blending proves to be scalable nationwide (i.e. in different climates) then the oil industry will long remember the start of the Summer driving season this April 1, 2013.

BTW.  If you've read this far and taken this blog seriously, we sincerely apologize.  Because it’s an April Fool. There is no Bracewell and Company study.  Nor is there any direct condensate-to-gasoline blending.  At least none that we know of.  Please do not put condensate in your car!   That would be crazy.  Just goes to show you can't take this energy analytics stuff too seriously, especially on April 1st.

" April Fool" is the second single from Canadian band Chalk Circle and the first from their 1986 debut EP

Each business day RBN Energy releases the Daily Energy Post covering some aspect of energy market dynamics. Receive the morning RBN Energy email by signing up for the RBN Energy Network.