An important shift has quietly occurred in the U.S. oil industry in the past month. In late June the Department of Commerce determined that two Texas companies, Pioneer Natural Resources (PXD) and Enterprise Products Partners (EPD), could start exporting an ultralight type of crude called condensate. That constitutes the biggest loosening of the U.S. ban on oil exports since it was passed in 1975.
After news of the ruling broke, Commerce Department officials seemed genuinely surprised by the reaction and announced that allowing condensate exports did not ordain a change in the law. Yet, that’s pretty much how the market treated it.
Energy companies are now lining up to get the same permission from the government as Pioneer and Enterprise. There’s talk of building condensate-only pipelines in Texas, home to some of the biggest such reserves in North America. The topic was discussed at length during the Energy Information Administration’s annual conference a couple of weeks ago, and analysts have even begun calculating valuations for oil companies based on a future where the export ban gets lifted.
The political reality is much different. Although lifting the ban has been discussed more in Congress this year than at any other time during the past four decades, the votes aren’t there and the debate is still an epic fight between oil producers who want to lift the ban and refiners who would rather that oil stay at home.
So for the time being, we’re left to consider the importance of exporting condensate. The problem with condensate is that the U.S. is producing way more than it needs. The most common use for it is as an additive to lighten up heavier crudes and make them easier to refine; it’s also used as an ingredient in chemical plants. But that’s about it. According to energy research firm Wood Mackenzie, the U.S. produces about 750,000 barrels per day of condensate. Since so much of the U.S. oil boom already involves light oil, there’s not a lot of heavy oil to add it to.
On top of that, U.S. refiners don’t really want it. Condensate is so vaporous, it can overwhelm the workings of a refinery and slow down the process of turning oil into a fuel. In a July 7 filing with the Securities and Exchange Commission, Valero (VLO) reported that condensates are “uneconomic feedstocks for our refineries; removing them from crude may improve refinery throughout and yields.”
The problem will get worse as the U.S. continues to increase its oil production at the fastest pace on record. The EIA anticipates that U.S. oil production will rise another 4.3 million barrels per day by 2015, to 9.3 million. The bulk of that new oil is going to be light and sweet; a lot of it is going to be condensate, considered to be anything with an API (American Petroleum Institute) gravity value of more than 45 or 50.
This will only exacerbate the mismatch between oil supplies and U.S. refineries, which aren’t set up to process that much light crude. Most are designed to handle heavier, imported blends. Refineries are already running close to full tilt at the moment, processing more crude than ever. Total refinery utilization is 91 percent, compared with 83 percent in 2009. Refiners are making investments to handle more light oil, but it won’t be enough to absorb it all.
So how much condensate can the U.S. export? Citibank (C) analysts think it could be about 300,000 barrels a day by the end of 2014. Sarah Emerson, president of consulting and research group ESAI Energy, says she agrees. Trade publications are reporting that the first shipment of condensate was loaded for export earlier this month and is destined for Asia. If that keeps up, the amount of U.S. oil exports could double by the end of the year. Canada is exempt from the export ban and already gets about 268,000 barrels of oil a day from the U.S.
To export condensate, oil companies have to run it through what’s called a stabilizer out in the field. This removes a lot of the vapor and makes it less volatile. Once that’s done, it’s ready for export and oil companies can bypass traditional refiners and send it directly for export. According to a June 25 Bloomberg Industries report, it takes about a year to build a stabilizer—and roughly $200 million. It’s unclear how eager some oil companies are to make that investment.
Fadel Gheit, an oil analyst at Oppenheimer (OPY), says he thinks talk of an condensate export boom is overblown. In the weeks after the Commerce Department ruling, he called more than a dozen oil companies operating in Texas. “Not one of them said they had plans to go big in condensate exports,” says Gheit. “It’s not an issue for them.”