Canada's tar sands unexpected winner from fracking

Updated 02 July 2012

Canada's tar sands unexpected winner from fracking

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.

Oil prices rise on gains prompted by tensions between US and Iran

Updated 25 June 2019

Oil prices rise on gains prompted by tensions between US and Iran

  • Russian energy minister praises international cooperation to stabilize oil markets

LONDON: Oil prices rose on Monday, extending large gains last week that were prompted by tensions between Iran and the US, as Washington was set to announce new sanctions on Tehran.

West Texas Intermediate crude was up 50 cents, or 0.87 percent, at $57.93 a barrel.

Brent futures were up 9 cents, or 0.14 percent at $65.29 a barrel by 1040 GMT.

US President Donald Trump said on Friday he called off a military strike in retaliation for the shooting down of a US drone by Iran, saying the potential death toll would be disproportionate, adding on Sunday that he was not seeking war.

Oil prices surged after Iran shot down the aircraft on Thursday that the US claimed was in international airspace and Tehran said was over its territory.

Brent racked up a gain of about 5 percent last week, its first weekly gain in five weeks, and WTI jumped about 10 percent, its biggest weekly percentage gain since December 2016.

But US Secretary of State Mike Pompeo said “significant” sanctions on Iran would be announced on Monday aimed at further choking off resources that Tehran uses to fund its activities in the region.

British Foreign Minister Jeremy Hunt said the UK believed neither the US nor Iran wanted a conflict but warned tensions could lead to an “accidental war.”

Also boosting prices, global supply may remain tight as OPEC and its allies including Russia appear likely to extend their oil cut pact at their meeting July 1-2 in Vienna, analysts said.

“An extension of OPEC+ production cuts through the end of the year seems highly likely given recent price action,” US investment bank Jefferies said in a note.

“The market expects an extension though, and any failure could see oil price gap down. The probabilities favor restraint however,” it added.

Russian Energy Minister Alexander Novak on Monday said international cooperation on crude production had helped stabilize oil markets and is more important than ever.

“There is a good example of successful cooperation in balancing the oil market between the OPEC countries and non-OPEC. Thanks to joint efforts, we today see a stabilization of world oil markets,” Novak said.

Boosting oil demand, prospects of a near-term interest rate cut by the Federal Reserve aimed at bolstering the US economy have weakened the dollar.

Oil is usually priced in dollars, and a slide in the value of the weaker greenback makes it cheaper for holders of other currencies.

Separately, Iranian crude exports have dropped so far in June to 300,000 barrels per day (bpd) or less after the US tightened the screws on Tehran’s main source of income, industry sources said and tanker data showed, deepening global supply losses.

The US reimposed sanctions on Iran in November after pulling out of a 2015 nuclear accord between Tehran and six world powers. Aiming to cut Iran’s sales to zero, Washington in May ended sanctions waivers to importers of Iranian oil.

Iran has nonetheless sent abroad about 300,000 bpd of crude in the first three weeks of June, according to two industry sources who track the flows. Data from Refinitiv Eikon put crude shipments at about 240,000 bpd.

“It’s a very low level of real crude exports,” said one of the sources.

The squeeze on exports from Iran, a member of the Organization of the Petroleum Exporting Countries, is a key factor for the producer group and its allies, which meet on July 1-2 to decide whether to pump more oil in the rest of 2019.

Iran’s June exports are down from about 400,000-500,000 bpd in May as estimated by the industry sources and Refinitiv and a fraction of the more than 2.5 million bpd that Iran shipped in April 2018, the month before President Donald Trump withdrew the US from the nuclear deal.

Iranian exports have become more opaque since US sanctions returned in November, making it harder to assess volumes.

Tehran no longer reports its production figures to OPEC and there is no definitive information on exports since it can be difficult to tell if a vessel has sailed to a specific end-user.

Refinitiv Eikon data showed Iran has exported 5.7 million barrels of crude in the first 24 days of June to the United Arab Emirates, Turkey, Singapore and Syria, although these may not be the final destinations.

Kpler, another company which tracks oil flows, estimates that Iran loaded 645,000 bpd of crude and condensate, a light oil, onto tankers in the first half of June, of which 82 percent are floating in Gulf waters.

That would put actual crude exports in the first half of the month even lower than 300,000 bpd.

“American restrictions are having a clear effect on Iran’s ability to sell into global markets,” Kpler said.