Between A Rock And A Hard Place - Condensate Market Shift Killing Splitter Margins

Two new 50-Mb/d, Kinder Morgan-owned and -operated condensate splitters came online during the first seven months of 2015, backed by a 10-year BP commitment to process a total of 84 Mb/d through the units. Located in the Houston Ship Channel’s refinery row, the splitters were expected to provide a profitable outlet to process growing volumes of the ultra-light crude oil known as condensate. Instead, average plant throughput through July 2016 has been only 71% of capacity, well below the 90% average operating level of neighboring refineries. The relatively low level at which these units have been operating reflects sagging condensate processing margins. Today, we detail how Kinder Morgan’s new splitters have been run during their first year or so of operation.  

This blog follows the recent Shooting Star post reviewing the impact of falling production on waterborne movements of the superlight crude known as condensate. As noted in that blog, there has been a drop-off in condensate export volumes—as tallied by our friends at ClipperData—and changes in the international and domestic destinations of condensate moved over water in 2016.  Recent changes in condensate movements reflect broader trends in condensate production, which has declined significantly in the face of lower crude prices and narrowing differentials between condensate and “regular” light sweet crudes such as the Gulf Coast benchmark, Light Louisiana Sweet (LLS). We explored these themes in Part 1 of our Faded Love series on condensates, where we looked at the impact of lower prices on condensate production and infrastructure in the Eagle Ford, and in Part 2, where we considered detailed condensate production data from the newly enhanced Energy Information Administration (EIA) EIA-914 dataset. Today’s post (based on a recent note published by Morningstar Commodities and Energy Research) zooms in on the fate of condensate splitters on the Gulf Coast, a few of which are up and running and a few more of which are due online in the next year or two. In particular, we look at the Kinder Morgan-operated splitters along the Houston Ship Channel that came online between March and July 2015.

In our previous posts on the topic (see the Dancing in The Dark and Whole Lotta Splittin’ Going On series) we described a condensate splitter as a simple refinery that uses atmospheric distillation to separate the feedstock into its component fractions (more on the operations in a minute). The Kinder Morgan splitter is located at the company’s Galena Park terminal, close to the Houston Ship Channel. The project was first announced in July 2012 and later expanded from one 50-Mb/d unit to two, ultimately both backed by a 10-year, 84 Mb/d minimum volume throughput commitment from BP. As of July 2016, Kinder estimated the cost of the splitters—as well as 2 MMbbl of associated condensate and refined-product storage—to be $485 million. The first 50-Mb/d unit came online about a year later than planned, in March 2015, and the second unit followed in July 2015. The splitter’s feedstock supply is delivered to the plant via a lateral to Kinder Morgan’s Crude and Condensate pipeline, known as KMCC. The KMCC came online in June 2012, delivering up to 300 Mb/d from DeWitt County in the South Texas Eagle Ford Basin into the Houston area. The initial 250-mile pipeline has been extended since 2012 to connect with the Kinder Morgan/Magellan Midstream joint venture Double Eagle pipeline, which originates in La Salle County, TX, at Gardendale. Data reported by Kinder Morgan to the Texas Railroad Commission (TRRC), which regulates the Lone Star State’s oil and gas industry, provides insight into the units’ first year-plus of operation.