ETF Trends
ETF Trends

The recent announcement by the Department of Commerce Bureau of Industry and Security (BIS) regarding the approval of two applications to export limited quantities of field condensate, after undergoing minimal treatment by way of a stabilizer, is significant and should improve the profitability of the Eagle Ford region’s exploration and production (E&P) companies.

Condensates are a hydrocarbon associated with the production of oil and natural gas.  Because of its higher API gravity, a measure used to compare the relative densities of petroleum liquids, than medium or heavy crudes, condensates can be more easily converted into products such as gasoline for example. However, the drawback is that condensates have less energy content per barrel than medium and heavy crudes. These lighter crudes have accounted for a significant percentage of the surge in US crude production. According to a recent report by the EIA entitled, “U.S. Crude Oil Production Forecast—Analysis of Crude Type” published in May of this year, approximately 96% of the 1.8 million bbl/d growth in production between 2011 and 2013 consisted of these lighter crudes (specifically those  with API gravity of 40º or above).1

Condensates fall into two categories: field/lease condensate and plant condensate. Field condensate is condensate produced from oil wells and put through a field separator, where the liquids are separated from the gases such as methane. Plant condensate is produced from raw natural gas through a fractionating process or plant separator.

Until this week the export of plant condensate was legal, but field condensate was not. The challenge for E&Ps producing large volumes of field condensate is that most refineries are set up to handle a relatively narrow range of crudes, and are largely not able to process this product. Those that lack hydrotreater capacity for example can’t handle crudes above a certain sulphur content.  Likewise those refiners that that have invested in billions in infrastructure, such as crackers and cokers to handle heavy crudes, like those on the Gulf Coast, are not set up to handle lights or super light crudes.  The wave of super light crude out of the Eagle Ford, including these field condensates, has overwhelmed the existing refinery infrastructure. As a result, domestic condensates have traded at a discount at the Gulf Coast in comparison to other regions, such as Asia, or even Edmonton, Alberta for example, where condensates are in high demand as a diluent to enable the pipeline transport of bitumen from Alberta’s oil sands.

So prior to the approval of exporting field condensates, we were in essence left with a product for which there was only a marginal domestic market.  Producers were undergoing complicated processes to get around the arbitrary distinctions between plant and field condensate; however, the most recent announcement by the Department of Commerce should make the export of field condensate much simpler through the use of stabilizers. A stabilizer is the means by which an E&P prepares condensate to be transported by pipeline. This is the key part of the ruling by the Department of Commerce; it was a green light for exporting field condensate once undergoing this process.

All in all, it was a ruling that makes good sense.  Condensate is of limited use to the existing Gulf Coast refineries that are set up to handle heavier crudes. By enabling the export of these light hydrocarbons, producers will have the ability to access international markets and obtain higher realized prices, and markets that need this product will now have access to additional supply. This should alleviate some of the congestion in the North American midstream infrastructure and likely positively impact Light Louisiana Sweet prices that are currently competing for refining space on the Gulf Coast. The oil market is dynamic and ever evolving. Keeping abreast of new developments and their potential impact on current and potential holdings is a key link in the chain of Peritus’ active management strategy.
1U.S. Energy Information Administration, “U.S Crude Oil Production Forecast—Analysis of Crude Types,” May 29, 2014, p. 2.

This article was written by Doug Holt, Energy Analyst for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD).