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Fifty Shades Lighter – The Lease Condensate Export Problem

Growing condensate supplies from tight oil shale plays are sloshing up at Gulf Coast refineries and being discounted by refiners that don’t need more of the ultra-light crude.  Meanwhile there are established international markets for condensate. The resolution seems obvious – just export the surplus condensate and import the kinds of crude oil needed by Gulf Coast refineries.  That’s likely okay if the export destination is Canada for use as bitumen diluent, but there is a finite limit to that market.  However exporting raw condensate to destinations outside North America is particularly tricky under U.S. crude-oil export restrictions. Today we delve into the nuances of what the export rules say and what the market is doing to deal with these regulations.

In the first episode in this series (see Fifty Shades Lighter) we introduced condensates, looked at their growing production and some of the common uses for this mixture of hydrocarbons. Then, in “Fifty Shades of Condensate – Which One Did You Mean?,” recognizing the general confusion out there about exactly what condensates are, we took a sidebar to provide some RBN Energy definitions to help our analysis.

The Condensate Market Challenge

A number of market developments are combining to create a U.S. surplus of condensate, a liquid hydrocarbon mixture close to light, sweet crude oil.  First, on the production side, several of the big oil shale plays are now producing volumes of condensate well above historical levels. The raw output is known as “lease condensate.”

Second, as described in a number of RBN blogs, many U.S. Gulf refineries have just finished investing billions of dollars to retool facilities to run heavy crude oil, and they neither expected nor planned for today’s onslaught of light shale crudes from plays virtually at their doorstep. (see Turner Mason and the Goblet of Light and Heavy).  While refiners always have blended some condensates into their crude streams, taking them on in the volumes now being produced will throw off their operational balances. What’s more, these light crudes produce higher volumes of gasoline blend components like naphtha when domestic demand for gasoline has been falling over the past 5 years. The more condensate refiners take on, therefore, the greater discount they will try to build into the price.

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