Processed Condensate

Condensates are quirky as heck — everyone’s got his or her own definition of what they are, for one thing — and their very quirkiness has sent condensates on a wild ride during the Shale Era. For example, the U.S. government for years categorized “conde” as a very light crude oil, and the long-standing ban on most crude exports meant you couldn’t export the stuff to anywhere but Canada. Unless, that is, you ran conde through a splitter to make NGLs, naphthas, and kerosene — those are petroleum products and they could (and still can) be exported, no questions asked. Then, as condensate production started soaring, especially in the Eagle Ford, the feds said that if you “processed” conde in special equipment to make it less volatile you could export it — no splitting required. That made the folks who invested in splitters shout in unison, “Huh?!” The roller-coaster for conde didn’t end there. The U.S. soon lifted the ban on all crude exports, and suddenly you didn’t need to process condensate at all to export it. More upheaval ensued. Today, we discuss this peculiar grouping of hydrocarbons.

Through the first half of the 2010s, U.S. production of field condensate — the ultra-light liquid hydrocarbon that bridges the gap between superlight crude oil and heavier natural gas liquids like natural gasoline — more than doubled, peaking at about 640 Mb/d in early 2015. As condensate production ramped up in the Eagle Ford and other plays, conde prices were discounted to move the product, markets were developed to absorb the barrels, and infrastructure was built to move the conde to those markets. Then, in a dramatic turnaround that continued into 2017, condensate production fell by more than one-third, the new markets — splitters and exports — were starved for product, and conde prices flipped from discounts to premiums. But the market is shifting yet again. Conde production is once more on the rise, with the Eagle Ford rebounding and production rising in the star of the show in crude oil markets: the Permian. Today, we discuss highlights from RBN’s new Drill Down Report on the condensate market roller-coaster.

The sharp decline in U.S. condensate production since early 2015 and the end to the ban on U.S. crude oil exports a few months later were a one-two punch for the companies that made throughput commitments to condensate splitters and made other conde-related infrastructure investments. In what seemed like a flash, conde supply plummeted and the steep price discount to WTI and other light crude that made conde so attractive for splitting and exporting was gone. Holders of splitter capacity were paying top-dollar for what conde they could corral, and operators were forced to run their brand-new facilities at far less than capacity. And, when the general ban on crude exports was lifted in December 2015, the special status that conde had enjoyed since exports of lightly processed conde were permitted in June 2014 was a thing of the past. Today, we continue our review of a conde world in upheaval, this time with a focus on splitters and exports.

Back in 2015, U.S. production of superlight crude oil and condensate had been on the rise for five years, driven primarily by boom times in the Eagle Ford shale play in South Texas. Condensate was selling for several bucks-a-barrel less than light-crude benchmark West Texas Intermediate (WTI), the U.S. government had recently approved the export of minimally processed condensate, and new condensate splitters were being built to allow refineries to use more high-API-gravity liquids. Fast forward to now, though, and production of superlight crude and conde is off by one-third ­­— the lighter the material, the steeper the decline — a barrel of conde is selling for several dollars more than WTI and a lot of those new splitters are running at far less than full capacity. As for exports of neat conde, they’ve dropped to almost zero, and whatever superlight crude and conde that is being exported goes out as part of blended crude. But things could be about to change again, possibly in a big way. Today, we begin a new blog series on the chaotic U.S. conde and superlight crude market.

Waterborne crude volumes (including imports) delivered to coastal refineries in Texas, Louisiana and Mississippi by domestic producers peaked at 27% of inputs in 2014 as regional plants processed increasing quantities of shale crude. Since then, these volumes have plummeted to 15% of inputs in March 2016 as Gulf Coast refiners have returned to more competitive imports instead. At the same time Eagle Ford crude volumes shipped along the Gulf Coast have fallen 28% this year in response to declining production and narrow price differentials between Texas and Louisiana ports. Gulf Eagle Ford crude now also plays a far smaller part in export markets than WTI grades. Overall exports have not increased since the end of the export ban but volumes to Canada have plummeted as shipments to other nations have increased. Today we review the shifts in waterborne flows across the Gulf Coast region.

The race to load the first freely exported U.S. crude cargo was won by NuStar’s Corpus Christi terminal, edging out Enterprise’s Houston terminal, as the Theo T set sail for Italy on New Year’s Eve with Eagle Ford crude and condensate on board. Midstream companies are now set to fiercely compete, not just for bragging rights but for terminal fees, as more U.S. crude heads overseas. But where exactly will that crude go? With oil prices tracking below $40/Bbl and narrow differentials prevailing between U.S. and overseas crudes, breaking into new markets will be tough. Today we outline which markets are most likely to absorb U.S. crude supply.

Crude oil distribution to Houston area refineries is still being re-plumbed to reflect the ongoing transition to domestic supply. Although plenty of new pipelines provide access for new crude flows into Houston, logistic challenges arise from a crude quality mismatch with refinery configurations. The handling of condensate – whether lightly processed for export or refined in a splitter is also increasing infrastructure overhead. Today we look at new crude infrastructure challenges in the Houston area.

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.

Natural gas producers are probably turning green with envy: Processed condensate exports out of the US Gulf are strong and getting stronger. Since the Department of Commerce threw the doors open to the export of lightly processed condensate, new loading points have emerged, new target markets have been found, and more companies have become involved. Today we describe how attention is now turning from regulatory and logistical issues to the challenge of finding buyers.

The Plains All American (PAA) Cactus Pipeline comes online in the West Texas Permian this month (April 2015). Cactus will bring up to 250 Mb/d of crude and condensate from Midland and McCamey in the Permian to Gardendale, TX - the heart of the Eagle Ford shale – linking the two basins for the first time by pipeline.  It also forms a major component of an expanded pipeline and dock infrastructure owned by a combination of PAA and Enterprise Product Partners (EPD) set to deliver as much as 600 Mb/d of crude and condensate to Corpus Christi and 470 Mb/d to Houston by the end of 2015. Today we describe how a good deal of those deliveries will be processed condensate eligible for export.