Dancing In The Dark – Will Gulf Coast Condensate Splitting Trump The Export Market?

Two years ago production of super light crude known as condensate in the South Texas Eagle Ford was surging. Most Gulf Coast refineries did not want to process this light material and it was discounted to regular crude. The discounts led to a number of project announcements to build stand-alone condensate splitters – a kind of simple refinery that would process it into refined products. During 2014 these projects were cast into doubt by the easing of condensate export restrictions that appeared to offer a less expensive solution to the condensate challenge. More recently the possibily of declining production could also threaten splitter economics. But splitters are still being built and coming online this year and next – with two new projects announced recently.  Today we review current splitter projects in the light of market developments.

We have devoted a lot of space in the RBN blogosphere to the topic of condensate – a material that has numerous definitions (see Like A Box of Chocolates). In this blog we are talking about lease condensate – a very light form of crude oil with a high API degrees gravity level typically between 55 and 70, and sometimes lighter. Lease condensate starts life as a gas underground and condenses from the gas stream at surface temperature and pressure. Although many of the crudes being produced from shale basins in the U.S. are very light the volume of condensate produced in the South Texas Eagle Ford basin is higher than most (see Finding a Home for Eagle Ford Crude). Because lease condensate has a lot of light end hydrocarbons (and varies considerably in quality) it is less attractive (valuable) to most Gulf Coast refineries that are configured to handle heavier crudes and as a result its price is discounted (see Day of Reckoning). Attempts to extract value from lease condensate in the past four years have variously involved shipping it to Canada for use as a diluent to blend with heavy oil sands bitumen crude – although that market generally prefers natural gasoline (plant condensate) produced by NGL plants  (see Parallel Lines Part 2) as well as processing it locally in simple refineries known as condensate splitters (see Whole Lotta Splittin’ Going On). A third market to export condensate to Asia and Europe developed in 2014 after the Bureau of Industry and Security (BIS) clarified regulatory interpretations that had prevented the export of condensate (except to Canada). The BIS began to recognize partially processed condensate to be exported as a refined product (see Ticket to Export). However, as we explained earlier this year (see No Particular Place to Go and What Condition My Condensate Was In) the export market for processed condensate is quite competitive and depends on wide discounts to international crude prices. In this blog series we look at the ongoing build out of condensate splitter capacity at the Texas Gulf Coast despite the easing of export rules and the now very real impact of slowing production growth. 

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Last year when new rulings from the BIS began to make it clear that exporting lightly processed condensate would be ok there were a total of 7 brand new condensate splitter projects being built or planned along the Texas Gulf Coast (more about these in a minute). The midstream companies planning to build these splitters for the most part signed up long term customers committed to “take-or-pay” deals to process condensate – meaning that they would pay processing fees regardless of whether they used the splitter – underwriting the infrastructure investment. Splitter customers hoped to take advantage of discounted prices for condensate (versus regular crudes) to produce more valuable products such as gasoline and diesel that could be sold domestically or exported without restriction. Concerns about the economics of condensate splitters largely related to the fact that they only produce semi-refined products – not finished gasoline or diesel and that they also produce some less valuable by-products such as fuel oil that might be difficult to sell.

We looked at the economics of condensate splitter projects back in February 2014 and at that time concluded that they were heavily dependent on a relatively wide price discount between condensate and crude (see Gulf Coast Splitter Economics). On the plus side, condensate splitters represent a significantly lower upfront investment cost than building a completely new refinery – even a simple one (for example the Magellan condensate splitter being built in Corpus Christi is estimated to cost $250 million for 50 Mb/d capacity but the greenfield 20 Mb/d Dakota Prairie refinery in North Dakota cost ~$400 million). Having said that – several existing refineries (e.g. Valero in Houston and Corpus Christi and Flint Hills in Corpus) have been upgraded or are in the process of being upgraded to process more condensate. These add-on investments to existing refineries add flexibility to process a wider range of crudes allowing refiners to increase margins by processing cheaper crudes. Because they form part of an existing refinery configuration these “upgrades” contribute to overall finished product output including processing fuel oil into higher value products in downstream units. Since these upgrades are not stand-alone we will not consider them as part of this analysis of stand-alone condensate splitters.

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