Way back when—before 2012—few outside a small cadre of oil producers and marketers paid any attention to condensates, or even knew they existed. Then two events shook the condensate world. First came rapid growth in the Eagle Ford, where crude oil production turned out to be almost half condensates. Then the Department of Commerce started allowing condensate exports while maintaining the ban on international sales of mainstream crude oil. Suddenly condensates were the star of the show. But like the careers of one-hit rock & roll wonders, the stardom didn’t last long. The crude oil price crash hit Eagle Ford hard, resulting in a disproportionate decline in condensate production. Congress then sent condensates further back into obscurity by removing the export ban for all crude oil in December 2015, eliminating any special status for the product. That was the end of the road for the condensate story, right? Wrong. Because during condensate’s day in the sun, billions were spent on pipelines, stabilizers, splitters, export facilities and refinery modifications, all focused on providing new markets for condensates. Oops. Today we consider how the next chapter of the condensate saga will play out.
This blog continues the Faded Love series on condensates (conde for short) that we started posting a few weeks back. In Part 1 we showed that while condensates (super-light crudes) are produced from all of the major basins across the U.S., the Eagle Ford in South Texas has been responsible for most of the production growth over the past five years, and that the Eagle Ford has been hit harder by low crude prices than any of the other major shale plays, resulting in declines in condensate production. We then touched on the splitters built to process condensates in the U.S. and on other infrastructure to handle segregated processed condensate for export –– now no longer required since the lifting of the crude/condensate export ban. Then in Part 2 we got into the weeds, looking at condensate production trends using the newly enhanced Energy Information Administration (EIA) dataset called the EIA-914, which gives us crude oil production statistics in 10 API gravity categories, including the two API gravity buckets above 50 degrees API where condensates reside. At that time the data confirmed that condensate production was falling, particularly in Texas. Since then, condensate production has continued to decline.
Figure 1 shows conde production in two of EIA’s 914 production data categories. The brown line is total U.S. production greater than 55 API, which fell from about 550 Mb/d to less than 470 Mb/d in May 2016. Slumping Eagle Ford production has been responsible for most of this decline. The blue line shows Texas production greater than 50 API. (EIA consolidates the 50-55 and 55+ categories for individual states for confidentiality purposes.) Even though the data is not apples-to-apples, it is still quite apparent that production of the lightest condensates is down by about 15% and that the decline shows no sign of abating.
One implication of the decline in production is a corresponding drop in conde exports. As shown in Figure 2 below—based on data from our friends at ClipperData—condensate exports ramped up from next to nothing in mid-2014 to 160 Mb/d by June of last year, then fell during the summer of 2015 as domestic demand for naphtha-range material pulled barrels out of the export market. Over the first five months of 2016, exports kicked back in again, but those gains came to a screeching halt in July when confirmed export volumes dropped to only 20 Mb/d. In the first few weeks of August, exports moved back to about 70 Mb/d (orange dashed circle).
Even though exports have been down lately, total conde volumes moving via water have been higher than might be expected considering that the price differential between Brent crude (the international benchmark) and Light Louisiana Sweet (LLS, the Gulf Coast benchmark) has averaged only about $0.30/bbl since June 2015. Conde prices tend to be loosely pegged to these two benchmarks. Thus it would seem that there would be little economic justification for moving this super-light crude from the Gulf to global markets if prices in the two markets are about the same, even though tanker freight rates are currently at ridiculously low levels. Nevertheless, barrels have moved –– a significant portion of them to U.S. refiners.
As shown in Figure 3 (left graph), the Texas Gulf Coast has been responsible for 76% of total condensates moved from U.S. port facilities. These volumes include both exports and cargoes on Jones Act-compliant vessels destined for markets in the U.S. About half of that total has come from Corpus Christi (orange pie segment, all Eagle Ford volumes), with much of the rest shipped out of Houston and Beaumont. Most of the remainder of condensate shipments has moved from the East Coast, with conde from West Virginia (blue segment) accounting for 10%, followed by New Jersey (7%) and Pennsylvania/Ohio (5%). (For more about East Coast condensates see our series titled in Whole Lotta Splittin’ Going On.) We’ll have more on Ohio condensates in an upcoming blog covering Marathon’s Cornerstone Pipeline plan.
The right graph in Figure 3 indicates the destination for these barrels. More than one-third of total shipments have gone to Europe (green pie segment), with most of the volume moving to the Netherlands, France and Italy (see our previous analysis of these condensate destination markets in What Condition My Condensate Was In). The second-largest recipient of U.S. waterborne condensate has been (drum roll, please) – the U.S. (aqua blue segment). Most of these barrels have been going to six destinations for use by refiners, splitters and blenders: Marathon at Garyville, LA; Petrobras at Pasadena, TX; Total at Port Arthur, TX; Hunt at Mobile, AL; Sunoco at Nederland, TX; and Plains All American at St. James, LA. For the most part, these condensates are moving directly or indirectly into the U.S. refining system, ending up as motor gasoline, including gasoline exports (see It’s a Small World After All). The remaining condensate outbound volumes have moved to the Middle East (10%), Latin America (10%), Asia/Pacific (9%) and various other destinations, some not yet determined (16%, black segment). Note that this last category includes a few ships that are apparently being used for floating storage – the ships have been anchored in the Caribbean for weeks.
Figure 4 shows how the sources of these volumes have shifted over the past two years. All along, the big driver has been Texas, with most volumes loading at Corpus Christi, Houston and Beaumont (orange bar segments, left graph). West Virginia (blue segments) was growing fast in 2015, but came off hard this year, mostly due to low crude prices that have discouraged drilling for wells with high condensate yields. Total volumes virtually collapsed in July (2016) due to lower production and seasonal demand in the U.S., recovering somewhat in August (red dashed box). The right graph indicates that Europe (green bar segments) continued to be the largest recipient of U.S. condensates, with the Louisiana market (red segments) taking a significant portion of barrels destined for U.S. markets.
So does all this mean that the conde star has faded and the product will forever be relegated to second-tier venues and sad reunion gigs? Hard to say. While ClipperData can identify the condensate moving out as “neat” product (that is, identified on the Bill of Lading as condensate), there also are conde barrels moving out as blend stock in light crude exports, mixed up with various other heavier crudes to create cocktails that can be labeled as “Domestic Sweet” or the generic “U.S. Crude”. That means that condensate still has a role as an opening act, if no longer the headliner. It is a similar story at the crude oil hub in Cushing, OK, where condensates from Oklahoma’s prolific SCOOP and STACK plays (acronyms for South Central Oklahoma Oil Province and Sooner Trend Anadarko Basin Canadian Kingfisher) are sought out as blendstock for various brews destined for domestic refiners.
But with condensates still moving to exports, local refineries and blend markets, what has happened to the condensate splitters built during the conde heyday to absorb what was then expected to be a surplus of this super-light crude? We will explore that issue in the next episode of this series.
Source: Shooting Star – The Condensate Star Has Faded, but What’s Next in the Conde Market? | RBN Energy