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Neither Fish nor Fowl – Condensates Muscle in on NGL and Crude Markets

Crude oil production in the Eagle Ford has ramped up from less than 50 Mb/d two years ago to almost 400 Mb/d today, and the growth shows no sign of slowing down.  In most reports and statistics, all of this volume shows up as crude oil.  But it’s not.  Between 60%-70% of this production is condensate – a hydrocarbon classification that is somewhere between crude oil and natural gas liquids.  It is valued differently from crude, can require handling different from crude, and can go into markets different from crude.  But neither is it a natural gas liquid.  Condensates are produced in the field, not extracted from a wet gas stream by a cryogenic processing unit.  Condensates are neither fish nor fowl. 

The growth in condensate volume is not unique to the Eagle Ford.  From the Granite Wash to the Bakken, they are becoming a much more important factor in the liquid hydrocarbons market.   They are already a bigger deal than you might expect.  Condensates make up about 11% of what is generally referenced as “crude oil” in the global petroleum market.

You can get a lot of definitions for condensates.  Schlumberger has the following description on their website:  “A low-density, high-API gravity liquid hydrocarbon phase that generally occurs in association with natural gas. Its presence as a liquid phase depends on temperature and pressure conditions in the reservoir allowing condensation of liquid from vapor.”  Let’s translate that.  Condensates generally come along with natural gas.  They can be either a liquid or a gas depending on temperature and pressure.  Generally field production moves through separators and stabilizers that allow condensates to ‘fall out’ of the gas at something around ambient temperatures and pressures.   In addition, condensates are produced out of the well in liquid phase.

The liquid condensate is a very light hydrocarbon, somewhere between 45 and 75 API gravity.  (WTI is about 39 API, Brent 35 API, motor gasoline mid-50’s API.)  The official delineation between a condensate and a crude oil is 45 API.  So this stuff is a highly volatile mixture of natural gas liquids (very high API numbers), naphtha range materials (like gasoline) and a variety of other cats and dogs.    You can run your tractor on a very clean condensate.

Because condensates have such a high percentage composition of light-ends (like NGLs and light naphthas) they require special storage and logistical equipment.   The NGL components can easily transition back to a vapor state, which means condensates must be handled carefully.

There are three primary markets for condensates: (a) sale as crude oil, (b) sale as diluent for heavy crude blending, and (c) processing in a splitter and sold as component products.

In many situations, the preferred market for the producer is a crude oil sale.  It requires the least special handling.  Condensate is blended with a heaver crude oil (say something in the 30-35 degree API range), which raises the average API gravity of the blend.  Higher gravity (lighter) crude oil usually commands a higher price.  But when condensates are involved, it can work the other way.  Refiners learned long ago that a crude oil blend that has been spiked with a light condensate has a large portion of lower value NGLs (relative to gasoline), and lots of light naphthas in the gasoline range.  …Little or no yield of distillates – which make diesel and jet fuel – and are what refiners are making most of their money on these days.  So refiners create pricing formulas (called gravity banks or bend-over pricing provisions) that compute a lower price for crudes containing a high portion of light condensates.  In other words, refiners discount the price they will pay for a crude-condensate blend.

A second market for condensates is the diluent market.  Diluent is used to ‘thin down’ Canadian oil sands crude so it will flow in pipelines without heating it, or processing through a syncrude plant.  New infrastructure is being developed to move more condensates into this market sector.  For example, Magellan and Copano are building a 140 mile pipeline to deliver 100 Mb/d of condensates to Corpus Christi, to be completed next year.  Some of these barrels are said to be destined for St. James, LA for shipment to Canada as a diluent stock.

The third condensate market is into a splitter for sale as component products.  Think of a splitter as a very simple refinery.  It is basically a distillation column that separates the condensates into raw mix NGLs, naphthas and other products.  The NGL ends can then be handled as a mixed NGL stream in a fractionator.  Naphthas can go into gasoline blending or the petrochemical market.   Some splitters are inside refineries while others are stand-alone units.  Several new splitters are being developed.  For example, Kinder Morgan is building a 25 Mb/d splitter on the Texas coast to process Eagle Ford condensates.

All this is very interesting, but what does it mean to the price of tea in China?  Or the price of hydrocarbons in the U.S?  Here are a few implications:

#1 – In the NGL market, condensates compete with natural gasoline.  Natural gasoline is a pentane-plus product, as are split/stabalized condensates.  They compete in the crude diluent market and in the motor gasoline blending market.  More condensates can’t be good for the relative price of natural gasoline, especially since the processing of wet shale has is also contributing additional supplies of natural gasoline.

#2 – Condensates are not the same thing as light sweet crude oil.  Much has been written about the increasing volumes of light sweet crude, and how U.S. light sweet production could completely eliminate imports of similar quality crudes or even result in a surplus of light sweet crude, suggesting U.S. crude oil exports.  But since half the incremental production of light sweet crude is really condensates, it is an open question as to how this will work.  Will condensates push out light sweet crude, or will they be exported as condensates, with light sweet crude continuing to be imported? 

#3 – Here’s the interesting fact about exports.  If light sweet crude does develop into a surplus market, the surplus can’t be exported.  It’s the law. [1]  You can’t legally export crude oil.  But interestingly, condensates (over 50 API) can be exported.  So a growing outlet for incremental condensate production may be the global market – which BTW is paying a premium these days.

Note - 2/3/13:  This blog was written in February 2012, and the comment above about an API gravity threshold for the export of condensates was included based on information provided in a conference that I attended earlier that month.  It turns out that this statement is inaccurate.  Later in 2012, Ann Davis Vaughan did a RBN blog series on condensates, concluding in the posting titled Fifty Shades of Condensates – Where is All This Condensate Going?    See that series for more on condensate exports. 

#4 – Whether the growing production of condensates pushes out all light sweet imports or not, the additional volumes definitely will be lightening up the total mix of crudes in North America.  This will tend to narrow the heavy-light differential more than it would have narrowed otherwise.  If you are a refiner just completing a heavy-crude upgrading project for a few hundred million $$$, this is probably not good news.

Condensates may be neither fish nor fowl, but they could ….foul…. up the plans of these refiners.  Sorry, that was bad.


[1] ANS (Alaska North Slope) crude oil has an exemption to the export restriction