By Kristen Hays
HOUSTON (Reuters) - Energy companies and oil trading firms that teamed up to build several mini-refineries that convert a swelling surplus of ultra-light U.S. crude into fuels for export seemed like a pretty safe investment bet for a while.
The bet was built on several converging dynamics: an ever-rising supply of condensate; a U.S. refining system built to run heavier crudes; and a longstanding ban on crude exports that appeared unlikely to unwind amid partisan paralysis in Washington, D.C.
Now, as U.S. oil output reverses its five-year rise and after lawmakers ended the 40-year-old export ban this month, oil executives and analysts question the wisdom of nearly $1 billion worth of so-called condensate splitters built over the past year, and the future of another $1.2 billion planned.
Traders are wondering what will happen with existing splitters run by companies such as Kinder Morgan Inc (N:KMI). They also question how the new landscape will affect traders such as BP (L:BP) Plc and Trafigura, which signed long-term contracts to buy all the output from those facilities.
Other pending projects without guaranteed buyers could be abandoned, experts say.
The once-restricted domestic crude not only faces increased competition. It also is hurt by the inversion of the global oil market, where once-abundant U.S. production is declining while global supplies are rising. This has eliminated the price discount that underpinned their model.
"It's a much different competitive environment now that we don't have distressed condensate," said Sandy Fielden, an analyst with RBN Energy.
While the same can be said of the nation's larger, older fleet of full-scale refineries, splitters may be most exposed to the sudden changes, given their dependence on the most deeply discounted variety of oil.
"Why would you distill it here if you can distill it elsewhere? The only reason you want to do it here is when it's cheaper, but now it doesn't make sense," said Nick Rados, global business director of feedstocks for IHS Chemical.
Still, many see a place for them to soak up the ongoing excess of condensate, the super light crude abundant in the shale patches of Texas and Ohio that standard refiners dislike.
Privately held Centurion Terminals is pressing ahead with construction of its storage terminal with two splitters in Brownsville, Texas, says Chief Executive Tom Ramsey, a former head of North American oil trading at giant Swiss firm Vitol. It has a 10-year deal with an undisclosed U.S. crude marketer to take 70 percent of the output, with a view to shipping fuel across the border to Mexico, where demand is growing.
"U.S. crude will continue to get lighter, and you have to do something with that product," Ramsey said.
SPLITTERS OR TRADERS?
Until recently, splitters were a rare phenomenon in the United States. Simpler and less sophisticated than refineries, they convert condensate into unfinished distillates and naphtha, a building block for gasoline that also can dilute heavy crude. Such oil was uncommon in America, and thus the need for specialized equipment limited.
But the shale boom changed that and triggered a race to build such facilities, seen as the quickest way to profit from an export ban that kept cut-price crude at home while allowing refined fuels to be sold overseas.
Kinder Morgan announced the first such splitter in 2012, backed by a long-term contract with powerhouse trader BP Plc. It started up the second of the combined $436 million Houston plants in July.
Buckeye Partners LP built another in Corpus Christi that started up this year, supported by Trafigura Trading LLC. Trafigura also will buy all the output from Magellan Midstream Partners LP's $250 million, 50,000 bpd Corpus Christi splitter now under construction. It is slated to be complete in 2016.
Other projects in earlier stages that lack a committed buyer for the output may not proceed, including Castleton Commodities International's proposed 100,000 bpd splitter in Corpus Christi. The Port of Corpus Christi said Castleton remains slated to start construction in mid-2016, but Fielden said it may be too late with others already filling the condensate niche.
Castleton declined comment.
If shipments of splitter output are no longer profitable, it remains to be seen how operators and traders will share the financial fallout. Buckeye says its contract with Trafigura is "take or pay", which typically means the customer must pay a certain fee at the facility regardless of whether they use it.
And even if the economics appear unattractive, trading firms may have other outlets. Trafigura, which stores and transports more than 1 million bpd of oil, supplies naphtha as a diluent for Colombia's heavy crude exports.
BP and Trafigura declined comment on splitter output prospects.
"Probably the whole decision on whether to build another condensate splitter on the Gulf Coast comes down to how those guys make out," said Fielden.