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Change in Export Ban: Paving Way for the Next Wave of US Production Growth and Infrastructure Boom

US oil producers were set to be their own worst enemies.  Without the ability to export, growing light oil and condensate production was set to overwhelm demand from US refineries over the next three years, depressing oil prices and forcing producers to lay down rigs.  It seemed that the coming oversupply of light crude and condensate could only be corrected by massive investment in condensate splitters, which turns crude into exportable refined projects.

Even with almost 700 mb/d of new US splitter capacity announced to date, it seemed that the wave of light oil and condensate oversupply would still arrive in the next three years. The forward curve for crude oil reflected this reality, with WTI prices falling from $106/bbl in the front of the curve, down to $87/bbl in 2019.  Producers in the Gulf Coast typically get a discount of $10-12 off of LLS for their condensate, and much of that discount is due to the higher naphtha yield produced from condensate. Those discounts could grow as refiners choose to substitute light crude oil for condensate in their feedslates.

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But yesterday’s announcement in the Wall Street Journal that two companies had received permission from the commerce department to export “minimally processed condensate”, which we take to mean as condensate that has been stabilized. Stabilized condensate has the potential to be a major leak in the dam that is the crude oil export ban. Essentially what has occurred is that the bar for what a refined product is has been lowered.

Prior to the clarification, the market was going to need new investment in demand to soak up incremental production growth.  The cheapest form of new demand was condensate splitters, which heat up the condensate to distill it in into the refined products LPG, naphtha, diesel, kerosene and VGO, and require approximately a $4-6/bbl investment.

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Condensate stabilization heats up the condensate just enough to separate out much of the LPG from the rest of the barrel, lowering the vapor pressure and making it more safe for transport.  For this reason, condensate stabilizer units are already in place in the Eagle Ford, Utica, Anadarko and offshore.  Quantifying the amount of stabilization currently in the field is difficult, as much of the stabilization is done by small units with 3-5 mb/d capacities requiring capital investments of less than $10M per unit.  BTU Analytics has identified just over 200 mb/d of larger facilities, the largest being Gardendale facility, in Gardendale, TX with current capacity of 80 mb/d and another 40 mb/d expansion coming. The cost of new stabilization capacity is also substantially lower than the $4-6/bbl investment required for new condensate splitters.

What does that mean to the supply and demand balance for condensate and light crude oil?  First, it means that producers can grow light crude and condensate supply without fear that they will overwhelm US demand, drown the market in crude and destroy prices.  Without a domestic demand constraint, oil production could potentially grow an additional 1 MMb/d beyond our previous forecast by 2019.  More production means we’re not done building infrastructure, and the industry will need to continue to invest in midstream infrastructure, including pipeline and rail.

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Kathryn Downey Miller is President of BTU Analytics where she leads the firm’s consulting and analytics groups in delivering market advisory services to clients across all sectors of the industry. Additionally, Kathryn oversees strategic planning, financial budgeting and analyst development for the company. Prior to founding BTU Analytics, Kathryn built market expertise in a diverse set of prior industry roles, including buyside investment research at an energy focused hedge fund, energy market fundamentals consulting at Bentek Energy, investor relations strategy consulting for E&P companies and investment banking at Citigroup. She speaks frequently at industry events on North American energy markets and is a CFA charterholder.

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