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US refining margins unlikely to feel big impact from condensate exports

07.07.2014  | 

“Limiting it to condensates is a bit of a win-win for everybody,” an analyst said. “Condensate gives a bit to the producers without really impacting the refiner. Compromise, one might say.”



A recent US ruling allowing limited exports of lightly processed oil may permit the equivalent of 3.6% of US crude to be sold on international markets this year, according to Citigroup.

About 300,000 bpd of an ultra-light oil known as condensate could be exported by the end of the year, Citigroup said. In total, 750,000 bpd of condensate is pumped from US shale plays, according to Wood Mackenzie. 

Exports would give US producers access to niche markets in Asia and Latin America, while having only a small impact on the price domestic refiners pay for crude, according to Steve Sawyer, an analyst at FGE, an energy consultancy.

“Limiting it to condensates is a bit of a win-win for everybody,” Sawyer said. “Condensate gives a bit to the producers without really impacting the refiner. Compromise, one might say.”

The US Commerce Department opened the door to more oil exports after Pioneer Natural Resources petitioned for approval to ship condensate from the Eagle Ford shale in Texas that has been stripped of gases to make it less volatile, a minimal level of processing known as stabilization. Condensate has been abundant in shale formations during the drilling boom, leading to at glut on the Gulf Coast.

“This is definitely not a game-changing shift in policy which would open the floodgates on exports,” Greg Priddy, director of global oil at New York-based researcher Eurasia Group, said in an e-mailed note. “Only a portion of US condensate production undergoes this sort of initial processing, and the volumes which will be freed up for export under these ruling will be modest.”

Asian Markets

Condensate exported from the US would probably appeal to buyers in China, Japan and South Korea as a feedstock for gasoline and petrochemical production, according to Ehsan Ul- Haq, senior market consultant at KBC Energy Economics.

“There’s certainly interest in Asia,” Ul-Haq said. Europe doesn’t need more condensate because it increases yields of gasoline, which the region already produces in surplus, he said.

Buyers in Venezuela, Brazil or Mexico might also purchase US condensates to blend with domestically produced heavy crudes to yield more high-value gasoline and diesel, although they may only need small volumes, said Sawyer.

The US has restricted most crude exports since 1975, in response to the Arab oil embargo. Shipments to Canada are an exception, and those averaged 246,000 bpd in March, the highest level since April 1999.

Litmus Test

“There’s been no change to our policy when it comes to crude oil exports,” White House spokesman Josh Earnest told reporters at a briefing.

Any oil that has been processed through a distillation tower of the kind Pioneer uses to stabilize its condensate is no longer defined as crude, and therefore is eligible for export, said Jim Hock, a US Commerce Department spokesman.

This decision over what was previously considered a “gray area” will gauge the global market’s reaction to a potential expansion of US crude exports, said David Wech, managing director at JBC Energy, a researcher in Vienna.

The US pumped 8.45 million bpd of oil in the week to June 20, according to US Energy Information Administration data. The Eagle Ford shale produced 205,000 bpd of condensate in the first quarter, according to data from the Railroad Commission of Texas. Pioneer Natural Resources pumped about 29,000 bpd of oil and natural gas liquids from the formation over the same period, according to a presentation on the company’s website.

The Pioneer ruling will be “a litmus test for the market in terms of how wide definitions are stretched and the window for exports is opened,” said Miswin Mahesh, an analyst at Barclays in London.

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