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."
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).
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.