The shale revolution at work today across the oil and gas industry was made possible by scrappy entrepreneurs risking their own capital and futures to pursue opportunities from onshore exploration and production in tight oil and gas formations and shale plays that the larger majors and super majors ignored. While the biggest players went offshore in the deeper water looking for big reserve growth, these revolutionaries used commercially available technologies available to them in 3D seismic imaging, horizontal drilling, and hydraulic fracturing to change the industry—and the world.
The big shift in the shale revolution at work today may be the oil industry response to the growth in oil supply mix especially the light hydrocarbon condensate resulting when drilling lowers the temperature and pressure in a reservoir changing the gas that naturally forms into light liquid hydrocarbons.
While natural gas can be exported as LNG, crude oil exports, on the other hand, are banned in the US. It is unknown if or when the crude oil export ban will be lifted. Meanwhile, shale oil supply growth onshore has to go somewhere and along with it comes more and more condensate heading toward the US Gulf Coast. This is another example of how the shale revolution is turning energy markets on their head.
North America oil production growth from tight oil continues to place pressure on the industry to increase infrastructure investment to keep pace. There is a lot of condensate in the oil fields of the US these days—so much so that it causes congestion as Gulf Coast pipelines and storage infrastructure tries to keep up with the volume. Finding a home for increased volumes of condensate is a growing concern across the industry. Increasing storage levels in the Gulf Coast is putting downward pressure on Louisiana Light Sweet (LLS) prices.
Why is condensate disrupting oil markets?
Condensate is a mixture of light liquid hydrocarbons formed from gas in underground reservoirs when pressure and temperature decrease with drilling. It is sold often at a discount to other crude types such as West Texas intermediate or Louisiana Light Sweet (LLS) in the changing oil markets.
Condensate is classified as crude oil with an American Petroleum Institute (API) gravity of 50 degrees or higher. Crude oil is classified by density where the higher the number the lighter the crude type. So, for example, light crudes would be above 38 degrees, intermediate crudes are 38-22 degrees and heavy crude oils are 22 degrees or lower.
The process of refining condensate into oil products extracts value from the potential uses made of it. Limiting the amount of condensate in the system or getting condensate through the supply stream fast makes room for higher value added crude oil. The oil industry factors shaping the market potential for condensate include:
- Pre-processing at Refineries. Gulf Coast refineries process heavy crude oil types like that coming from Venezuela. They are not designed for large volumes of condensate yet more of it is heading to the Gulf Coast from the onshore shale production. US EIA reports condensate production doubled from 500,000 b/d in 2010 to more than 1 million b/d in 2013. Some blending of condensate into the heavy crude types is likely up to the tolerance of the refinery, but more condensate is being produced than the market and infrastructure can currently handle. The remainder must be pre-processed, refined and exported. Some relief may come as midstream firms build pre-processing units or topping units at Gulf Coast refineries to meet the demand.
- Blending as Diluent. A fast growing use of condensate’s light gravity properties is to blend it with heavy crudes like bitumen from Canada’s oil sands so blended crude can flow through the pipeline system. Demand for this diluent in Canada is growing as bitumen production grows faster than the local supply of diluent can meet the need. What is needed is a rationalizing of pipeline and storage infrastructure to get this diluent to Canada to match oil sands production.
- Condensate Splitters in Regional Markets. Splitting the condensate into its components using a splitter unit costs a lot less than a new refinery and can be located apart from the refinery. This ‘splitter’ refining process for condensate has the potential for regional markets for condensate onshore away from the Gulf Coast in plays producing enough volume to make the economics work. Condensate rich plays today include Permian and Eagle Ford in Texas, Utica shale in Ohio, North Dakota’s Bakken and Niobrara Shale in Colorado and Wyoming. If secondary markets for condensate materialize then large buyers of condensate like the Canadian oil sands have more choices of supply and may be able to get attractive prices if the pipeline infrastructure can support it.
- Export as Refined Products. Processing condensate so it can be exported as refined products under US law involves fractionating or splitting the light hydrocarbons into products such as light and heavy naphtha, kerosene, diesel and gas oil. Exporting condensate could relieve Gulf Coast bottlenecks, relieve the downward price pressure on Louisiana Light Sweet crude oil and clear the market faster. Senator Lisa Murkowski of Alaska has proposed a simple regulatory change to redefine condensate by its density at around 45-70 API gravity so it no longer is considered crude oil and thus can be exported.
The shale revolution in the US is expected to increase US oil and gas onshore production through at least 2020 when it is expected to peak. By then conventional supply from deepwater Gulf of Mexico and Canadian oil sands is expected to pick up the slack.
But crude oil prices are set in global markets and thus have not fallen like US domestic natural gas prices. That probably explains why the fastest growing onshore plays are the combination ones that produce both natural gas and crude oil. Why? Because combo plays offer the potential for profitable growth across a range of petroleum products from dry gas to natural gas liquids, from heavy black crude oil types to light sweet crudes and an even lighter crude petroleum product called condensate.
This discussion of condensate growth in the onshore oil stream is evidence the shale revolution is also at work transforming the oil business as it has for natural gas. In Canada, the enormous production potential for oil sands especially when combined with onshore US tight oil and shale growth, and expected return to deep water Gulf of Mexico production suggests that North America will be a global energy leader for years to come.
How is condensate changing oil product economics?
- Transport of Condensate presents Safety and Quality Issues. The volume of condensate in the pipeline and transport system is causing concern among shippers to take action to reduce vapor pressure limits in pipelines to prevent too much condensate from entering their system. These same volatile light crudes are also increasingly a concern in rail transport because of several accidents drawing more attention to rail safety issues.
- Condensate Growth Challenges Refinery Economics. US oil and gas production from shale is growing and with it the expected growth of condensate is forcing the industry to take action to restrict the volume of light condensate hydrocarbons entering Gulf Coast oil refineries. The economics favor pre-processing condensate before the refinery or leveraging small splitters to do so closer to the well sites. This shift in condensate processing is disruptive innovation at work reshaping oil markets as a result of the shale revolution.
- Cushing Congestion Moves to the Gulf Coast. Oil pipeline additions are shifting the Cushing infrastructure bottlenecks further south to the Gulf Coast. While topping units can be added to the Gulf Coast refineries to separate condensate other options include building package condensate processing plants in the plays themselves creating regional market hubs. Doing so may change transportation project economics. How will this affect markets? Will adding condensate splitters in onshore shale plays make exports easier on East/West coasts?
- Condensate Influences the Price of Crude Oil. The volume of condensate and light crudes coming to market puts downward pressure on West Texas intermediate (WTI) and Louisiana Light Sweet (LLS) prices compared to Brent. The other factor is that the liquids-rich plays such as Eagle Ford contain both condensate and natural gas liquids. Condensate is produced from a wet gas well Condensate is also produced from oil wells but there it is found mixed with the crude and not separated. The crude wells in Eagle Ford are increasingly lighter but may not be pure condensate. So will the growth in condensate crowd out higher value oil in the pipeline and storage system as congestion moves to the Gulf Coast?