Canada's tar sands unexpected winner from fracking



John Kemp

Published — Monday 2 July 2012

Last update 2 July 2012 7:44 pm

| نسخة PDF Print News | A A

LONDON: Soaring output of light condensate in the United States has crushed refining margins for naphtha and added to the global gasoline surplus.
But it is also providing a boost to Canada's oil industry, which increasingly benefits from a captive source of the diluent needed to make bitumen and heavy oil flow through processing facilities and pipelines.
In the past two years, collapsing gas prices have forced drilling companies in the United States to shift from targeting dry gas fields to liquid-rich plays containing a mixture of gas and more valuable crude oil and condensate to keep paying the bills.
The result has been an upsurge in output of very light liquid fuels variously described as light condensate, drip gas, pentanes plus or natural gasoline, which compete head one with the light naphtha traditionally produced by oil refineries, an essential component in the production of both motor gasoline and petrochemicals.
The sudden increase in availability of light hydrocarbons like pentane (which has five carbon atoms) and hexane (six carbon atoms) has crushed refining margins for light naphtha in North America, and added to downward pressure on the naphtha market worldwide.
It is also worsening the global refining imbalance, which is producing too much gasoline and not enough diesel, pushing gasoline prices to a discount and worsening the outlook for older refineries in North America and Europe.
As US prices for naphtha and natural gasoline fall, more and more of the surplus condensate is being exported to Canada for use in the production and transportation of bitumen and heavy crude oils, where it is being added as a diluent to improve viscosity and help them flow more easily through the processing and pipeline system.
In the first three months of 2012, the United States exported 10 million barrels of "pentanes plus," almost all to Canada, compared with less than 1 million barrels in the corresponding period last year, according to the Energy Information Administration (EIA), the independent statistical arm of the US Department of Energy.
EIA defines pentanes plus as "a mixture of hydrocarbons, mostly pentanes and heavier, extracted from natural gas. Includes isopentane, natural gasoline, and plant condensate."

COCHIN REVERSAL
Exports seem set to rise further. On June 5, Kinder Morgan Energy Partners announced it had secured binding commitments to transport more than 100,000 barrels per day of light condensate (pentanes plus) for at least ten years on its Cochin pipeline from the US state of Illinois to Fort Saskatchewan in Alberta, Canada.
At present, Cochin transports propane and propane-ethane mix from Canada to the United States. But as US gas output surges, demand for Canadian exports has fallen and the line is operating at a fraction of its rated capacity. Meanwhile, rising output of bitumen and heavy oil in Canada requires increased imports of light condensate to dilute the viscous crude.
"The Canadian National Energy Board is projecting a need to import over 180,000 barrels per day of pentanes plus into Canada by 2014. By 2020 and 2025, the import demand for light condensate is projected to grow to over 330,000 barrels per day and over 450,000 barrels per day, respectively" according to Kinder Morgan.
"The projected import demand will exceed the currently available pipeline capacity by the end of 2014, creating an opportunity for the conversion of existing, underutilized pipeline capacity to meet the growing market demand" ("Notice of binding open season for the Cochin reversal project" April 24, 2012).
From July 2014, subject to regulatory approvals, Kinder Morgan is proposing to reverse the flow on Cochin to transport light condensate northwards, and link it up with the Explorer pipeline, bringing light products up from the fast-growing shale gas and oil fields along the US Gulf Coast, including the Eagle Ford formation in Texas.
The Cochin reversal, new tank facilities and the link to Explorer will allow light condensate from Eagle Ford and other liquid-rich plays to be sent directly to oil sands producers in.
Ironically, Canada's oil sands producers benefit from a captive source of supply. US regulations banning the export of crude oil also apply to lease condensates and drip gas, which means they cannot normally be sent to other countries but may be exported to Canada for consumption or use therein owing to a special exception for the country's northern neighbor (15 CFR 754.2).

CONDENSATE GLUT
Exports are increasingly critical for the U.S. condensate market. In the second half of 2011, US stocks of pentanes plus surged to over 17.5 million barrels, exceeding previous highs set in 2010 and 2007, and far above normal levels of 6-10 million barrels. By the end of March 2012, commercial stocks of light condensate were still at almost 16 million barrels.
Stocks would have risen even more strongly were it not for the surge in exports to Canada (Charts 3-4). Even so, oversupply has helped push cash prices for light condensate and natural gasoline to a steep discount against regular refinery-produced gasoline, which contains other heavier molecules such as octane.
Predictably, rising output of light condensate is putting downward pressure on margins for refinery-produced light naphtha, which has traditionally been blended into regular motor gasoline, as well as being used as a feedstock for petrochemicals, and a diluent for heavy crude transportation.
It also worsens the global imbalance between gasoline and diesel production. Motor gasoline is a mix of hydrocarbons with mostly four to twelve carbon atoms while diesel fuel generally contains a mixture of slightly heavier molecules with between 8 and 21 carbon atoms.
Policies to promote the use of diesel rather than gasoline in Europe, coupled with growing demand for diesel in emerging markets, and rising production of condensate around the world, have resulted in refineries producing too much gasoline and not enough diesel.
The sudden increase in US pentane and hexane production is worsening the imbalance, adding extra molecules to the gasoline pool, while doing nothing to relieve the shortage of heavier molecules in the diesel segment.
Much of the extra US condensate will be used in transporting bitumen and heavy oils from Canada. Some will be lost as a result of evaporation in the pipelines. More will be lost in refining. But most will ultimately be recovered when the diluted heavy oils are passed through a US refinery, adding to the gasoline/naphtha pool glut.

— John Kemp is a Reuters market analyst. The views expressed are his own.

What's happening around Saudi Arabia

ABHA: Several Saudi businesswomen started traveling with a group of friends after recent regulations which allow women to travel without their mahram. These women said they find great fun to travel as a group with their friends and their children, wh...
RIYADH: The United Nations, Arab League and Gulf Cooperation Council welcomed the Kingdom-led coalition’s announcement of a five-day cease-fire, that took effect at midnight on Sunday, to push humanitarian relief in war-ravaged Yemen to the beleaguer...
ALKHOBAR: Jobless Saudi women constitute 70 percent of the unemployed. The Ministry of Economy and Planning said 58 percent of the jobless have preparatory school level education. According to the statistics, the annual unemployment growth rate among...
RIYADH: Saudi Arabia has found traces of a civilization that was domesticating horses about 9,000 years ago, 4,000 years earlier than previously thought. The discovery has shed new light on the origin of the Arabian horse, which has remained a great...
RIYADH: The Ministry of Labor in the Makkah region found 250 laborers working on various construction projects during restricted hours of the day. Punitive measures will be taken against the employers of these workers. According to a ministerial decr...
JEDDAH: When poverty is your guest for 15 years, gardens, parks, streets and pavements become your abode under the unavoidable scorching sun. One has to face hardships of hunger and survive on breadcrumbs. This is the situation of a 60-year-old Saudi...
JEDDAH: The negative attitudes of society in dealing with harassment and abuse cases prevent victims from reporting a great number of such cases to the authorities.Despite this, about 3,982 cases reached the country's criminal courts in 1435 and 1436...
AL-QATIF: The Omani security forces have arrested a man who, they said, accidentally fired a bullet that hit a young Saudi girl in a hotel in Musandam on Saturday. Four-year-old Zainab bint Mohammed Labad of Al-Awamiyah was playing in the hotel lobby...
Ramon Corvera, deputy chief of mission at the Argentinian Embassy in Riyadh.* Which particular aspect of Saudi Arabia you like the most? The natural beauty of the desert.* What is your favorite and oft-repeated Arabic word? Masha’Allah.* Which book i...
JEDDAH: The creativity and entrepreneurship community program of Umm Al-Qura University brought together 80 creative entrepreneurs to exchange their experiences and knowledge on Monday. Fawaz Saad, the dean of the institute for innovation and entrepr...
RIYADH: The August issue of ‘Nature’, the monthly magazine of King Abdulaziz City for Science and Technology (KACST), will focus on Middle East Respiratory Syndrome (MERS) corona, which has affected 1,055 people in the Kingdom since June 2012.The to...
LILLE, France: Saudi Arabia’s firm stand against the phenomenon of violence as well as religious, ethnic and cultural fanaticism came in for praise at an international symposium, which concluded here.The participants of the symposium on "Media Covera...
DAMMAM: Saudi Arabian Boy Scouts Association (SABSA) is participating in the 23rd World Scout Jamboree with the slogan “A Spirit of Unity,” which starts July 28 and runs until August 8 in Kirara-hama, Japan. A total of 32,000 scouts from 144 national...
JEDDAH: The Ministry of Labor was able to increase the number of Saudi women employees from 70,000 to 428,000 during the past four years, Abdul Munim Al-Shehri, assistant undersecretary for special programs, has said . The ministry is now working on...
JEDDAH: A court issued a 10-year prison sentence against a health employee in Al-Ahsa and fined him SR1 million for getting involved in forgery and fraud as well as embezzling public funds in contracts to import medical equipment for the Children and...

Stay Connected

Facebook