Condensate Pries Open the Oil Export Lid
US Administration OKs Exports without Requiring Congressional Approval
I see that the US Commerce Department has given two US companies permission to export condensate that would otherwise be trapped here under a 1970s-vintage ban on US oil exports. This validates the view, as described in a white paper from the office of Senator Lisa Murkowski (R-AK) earlier this year, that the administration has the statutory authority necessary to allow such exports.
After decades of investment to process the increasingly heavy and sour crude oil types available for import, most US refineries, particularly on the Gulf and west coasts, are no longer equipped to run large volumes of the extremely light condensates and oils now coming from onshore shale deposits. Allowing producers to achieve world-market prices for their output should boost the economy and raise tax receipts, yet is unlikely to harm consumers.
Condensate Exports Won’t Reduce US Gasoline Production
Condensates are a class of hydrocarbons distinct from crude oil, but they share enough oil-like characteristics frequently to be lumped in with the latter, as in US export regulations. The technical definition of condensates encompasses both the “natural gasoline” extracted during the processing of natural gas produced from oil fields (“associated gas”,) as well as the heaviest liquids separated from “non-associated” gas, i.e. from gas fields, rather than oil fields.
The condensate being exported in this case comes mainly from liquids-rich shale deposits like the Eagle Ford in Texas, which produces varying proportions of dry gas, “wet” gas containing NGLs and condensate, and crude oil, depending on well location. Condensate apparently accounts for around 20-40% of Eagle Ford “tight oil” output.
Condensate mainly consists of natural gas liquids like ethane, propane and butane, along with substantial quantities of naphtha, a low-octane mix of hydrocarbons that boils in the gasoline range, plus much smaller proportions of diesel and heavier “gas oils” than would be typical of crude oil. The naphtha in condensate can sometimes be blended into gasoline, depending on its specific qualities, or processed in a refinery to yield higher-quality gasoline components.
Subsequent to the phase-out of tetraethyl lead, most gasoline from US refineries has been a blend of higher-octane naphthas produced by catalytic cracking units and the “reformate” from catalytic reforming units, and intended for further blending during distribution with up to 10% ethanol. Last month US refineries set an all-time record for gasoline production, at over 10 million barrels per day. They are unlikely to miss the naphtha exported in condensate.
Petrochemical Market Demand
Historically, the global market for condensate has had important distinctions from the broader crude oil market, based on the inherent characteristics of these liquids and the end-users seeking them. Refiners running mainly heavy oils sometimes buy condensate to lighten their average inputs and fill gaps in their processing and blending capacities.
With the Gulf Coast now drowning in light “tight oil” from shale, this is becoming too much of a good thing, as refiners increasingly have more light material in their feedstock than their facilities can easily handle. The result is prompting investment in new facilities to provide minimal processing–really just distillation–for condensate.
By contrast, petrochemical producers, particularly in Asia, are expected to import growing volumes of condensate for use in the production of olefins like ethylene and propylene, and aromatics like toluene and benzene, from which to make plastics, solvents and other petrochemicals. In that market, US condensate will compete with condensate from other gas producing nations, and with exports of refinery naphtha from Europe and elsewhere. This looks like a good opportunity for US firms.
Conclusions – Will Condensate Exports Lead to Crude Oil Exports?
Advocates of lifting the ban on crude oil exports will likely see the Commerce Department’s ruling as a precedent for allowing exports of all types of oil, or at least a good first step. However, some reports have focused on this ruling as an end-run around the export rules by redefining minimally processed condensates as a petroleum product, and thus exempt from the ban. In that case, the resulting precedent from condensates for exports of true crude oil may be weaker than that from ongoing, permitted oil exports to Canada.
Either way, I believe this is a smart move that, if continued, should ease crude congestion on the Gulf Coast and reduce the likelihood of fratricide–steep discounts making domestic oil less economical to produce, benefiting imports. It might even push the problem beyond the current election year, allowing Congress to consider normalizing all oil exports, without the inhibiting effect of populist pressures at the polls. In the meantime, you can bet these condensate exports will be closely scrutinized for any noticeable effects, good or bad.