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Page added on July 3, 2014
The Real Significance Behind That Oil Export Hoopla
There was a lot of hoopla last week over the news that the U.S. Department of Commerce had seemingly loosened rules governing the export of condensate — light weight hydrocarbons recovered from oil and gas wells. The excitement was palpable; shares in oil refiners sold off. Was this the start of the big policy shift that oil producers have been dreaming of? An end to the 40-year oil export ban?
Maybe. But not in the way people thought. “I’m not sure reality lived up to the fanfare,” says Harold York, principal analyst with energy consultancy WoodMackenzie.
Andy Weissman, senior energy advisor at law firm Haynes & Boone says, “I think it’s quite important, but it’s a very technical ruling, like dotting an ‘i’ more than anything else.”
The White House, caught off guard by the initial coverage in the Wall Street Journal, said there had been no change in oil export policy. It’s still illegal to export American crude oil. It’s still illegal to export unprocessed “lease condensate.”
The Bureau of Industry and Security had, it seems, done little more than issue private letter rulings to Pioneer Natural Resources PXD -1.84% and Enterprise Products Partners agreeing that those companies’ plans for processing condensate were sufficient to qualify the condensate as exportable.
So what’s the big deal? It’s certainly no big deal that American oil producers can export condensate. They’re already doing so, in fast-growing quantities. In the data from the U.S. Energy Information Administration, processed condensate is falls mostly into the category of “pentanes plus.” A decade ago the U.S. was exporting 1,000 barrels of it per day. But as the Great American Oil And Gas Boom has taken hold, exports have jumped — to 32,000 bpd in 2010 and 200,000 bpd this year.
Refiners and pipeline giants like Valero, Kinder Morgan KMI -0.83% and Marathon Petroleum MPC +1.62% have, for several years now, been investing heavily in “mini-refineries” to take the streams of volatile liquid hydrocarbons flooding out of fields like the Eagle Ford shale of Texas and distill them enough to export.
There is one element of this story that is a big deal. And that is the fact that this most recent export approval was sought not by a refining or pipeline company, but by an independent oil production company — Pioneer Natural Resources.
For years now, as U.S. field production of oil and other petroleum liquids has exploded from 5.5 million bpd (2006) to 11.3 million barrels per day (April), the oil companies have been complaining that unless the export ban is lifted they will have to lay down their rigs and stop drilling — because there will be more oil than America’s refineries can handle.
That’s not a problem for the refiners, who are happy to be running their plants at capacity while able to pay a deep discount for domestic crude.
But if Pioneer and its many brethren like Continental Resources CLR -1.82%, Chesapeake Energy CHK +0.03% and Devon Energy DVN -0.63% can take matters into their own hands by building their own mini-refineries to process condensates, they will be able to pocket the margin that would otherwise go to the refiners. And by adding condensate-processing capacity of their own, they automatically open up capacity at the refineries to take more of their heavier crude. Pioneer expects that within a decade it will more than quadruple its production of oil and other liquids to more than 1 million barrels per day.
Attorney Weissman says that we could soon see a host of new condensate processing plants being built: “We could see 1 million barrels per day of condensate exports in a year.”
Oil well pump jacks (Photo credit: Richard Masoner / Cyclelicious)
Still, they’re going to need a helluva lot more than some mini-refineries. Wood Mackenzie analysts figure that between now and 2020 drillers will add an incremental 4 million bpd of oil output, bringing the domestic supply above 15 million bpd. Analyst York believes all that oil can get processed domestically. “We can get it into the U.S. refining system. It physically fits. It’s just a matter of price.” The producers will have to be willing to accept enough of a discount on their oil, relative to international prices, to coax the refiners to take it.
Most of the big U.S. refineries have been optimized to process heavier, higher-sulfur crudes than those coming out of Texas and North Dakota. But a $10 per barrel discount for U.S. crudes should, over the long-run, incentivize refiners to buy American.
U.S. imports of crude oil and products have fallen from 14.5 million barrels per day in 2006 to 9.6 million bpd in April. In that same time exports of products like gasoline, diesel and condensates have jumped from 1.4 million bpd to 4 million bpd.
If WoodMac is right about the expected production growth, and if exports of gasoline and diesel (and condensate) continue to grow as American cars become more fuel efficient, then by the end of the decade the U.S. really could become a net exporter of petroleum.
Maybe then, when we’ve got more oil than anyone can figure out what to do with, Congress and White House will finally get behind a plan to end the crude oil export ban once and for all.
13 Comments on "The Real Significance Behind That Oil Export Hoopla"
Pops on Thu, 3rd Jul 2014 7:33 am
“Maybe then, when we’ve got more oil than anyone can figure out what to do with …”
I thought we had more oil than we know what to do with now?
Oh, yeah, it ain’t oil, it’s condensate, liquid plastic, chachka tea
forbin on Thu, 3rd Jul 2014 8:45 am
” …. end of the decade the U.S. really could become a net exporter of petroleum…..”
the evidence of this is rather scarce in my opinion, based on the current facts and projections
may be Forbes is trying to say “buy oil stocks now!” , hmm, given the hughe debts of the Fracking crowd I’d give it a miss but as an informed target I guess I was not in their sights anyway ….
Forbin
Calhoun on Thu, 3rd Jul 2014 9:22 am
Wood Mackenzie analysts figure that between now and 2020 drillers will add an incremental 4 million bpd of oil output, bringing the domestic supply above 15 million bpd.
Since the vast majority of incremental oil would have to come from LTO, and given the high decline rates on LTO, I’d sure like to see the math that gets us to 15 mbpd by 2020. How many incremental wells would we need to reach that level?
shortonoil on Thu, 3rd Jul 2014 9:52 am
PR, disinformation, or just plain old stupidity. Hard to tell from here? Of course when this Forbes writer quotes something like:
“Still, they’re going to need a helluva lot more than some mini-refineries. Wood Mackenzie analysts figure that between now and 2020 drillers will add an incremental 4 million bpd of oil output, bringing the domestic supply above 15 million bpd.”
you have to believe it is just plain old stupidity. They must be counting on all the production that is going to be coming out of the Monterrey; which as we have recently found, is not there.
But part of this apparent confusion must be laid on the shale industry. Condensate is the liquid that “condenses” from the high temperature, high pressure gas stream coming from an oil well, or condensate well. Condensate production from conventional wells (which have an associated gas stream) has been around since the 1930’s, and is mostly pentane. Russia began producing from a condensate field (which is a high pressure, high temperature gas, single phase fluid in the ground) in 1968. A few years ago EOG, in an investor call that attempted to trump its competition, started calling all crude above an API of 45 condensate. That was to prove that their oil was better than everyone else. Unfortunately, the name stuck. So we now have “condensate”, the real stuff, and the shale industries’ “condensate”.
To complicate the issue we have statements like:
“It’s still illegal to export unprocessed “lease condensate.”
Lease condensate comes from conventional well production, and it is all processed because it must go through a “field stabilizer” to become condensate. Otherwise, there would be nothing but a bunch of hydrocarbon gases stinking up the country side. So if the shale industry took some LTO (light, and ultralight crude, which they can’t sell) and mix in some “condensate” is it exportable “condensate”?
Of course, that would be violating the “spirit of the law”. It is hard to fathom that any shale producer would do such a thing!
http://www.thehillsgroup.org/
PCTECH on Thu, 3rd Jul 2014 10:26 am
I doubt we’ll ever see 15million bbd. Conventional oil production in the US. is tanking. Tight shale will never replace it all.
Plantagenet on Thu, 3rd Jul 2014 10:29 am
The Obama administration made another dumb move liberalizing US oil exports. They clearly don’t have a clue about peak oil.
rockman on Thu, 3rd Jul 2014 10:36 am
And again the discussion of exporting US oil ignores the elephant in the room: the US refiners crack about 3 million bopd and export the products. If exporting US “oil” is a controversial issue the why isn’t exporting the products of millions of bopd?
There is a practical answer to that question: we aren’t exporting the products made from US oil…we’re refining a portion of the oil we import. I don’t know which bbl (domestic or imported) is being cracked and exported. But in a spreadsheet the balance is obvious: the US is still a net importer of oil even if one removes the oil that’s cracked and exported from the total imports.
And again I’ll point out that the eastern Canadian refineries that are importing Eagle Ford oil aren’t making “plastic” out of it. Actually plastics are typically made from NG. They are making motor fuels and even a little bit of bunker fuel out of the EFS production. I’ve posted those very words from the Newfoundland refiners. The Canadian refiners are switching to cheaper US oil from more expensive Nigerian et al OILS. The other day I also posted the typical composition of the EFS production and compared it to WTI. There isn’t a very big difference especially in the gasoline and diesel percentages but a good bit more in the pentane yield. The EFS composition isn’t the hang up. It’s the nature of the Coast refineries that were constructed to crack heavier crude. It would require expensive modifications but GC refineries could produces better margins from the EFS production then the Canadian refineries given those refiners have to pay for the transport half way around the country.
I’m not connected with the GC refineries so I can only speculate why they haven’t done the conversion to handle the lighter oil. Two possible reasons I can speculate on. First, US refiners are not confident in the long term supply of EFS production. Once the high decline rate of the first few years hits a new well the residual production is relatively little. Long term supply will thus be dependent upon the current very high drilling rate. But that could fall very quickly for several reasons. Those reasons have been discussed here before so I’ll skip.
The second reason is the expectation of long term delivery of the heavier oils. Not just from the Canadian oil sands but México and Venezuela. The changes in the political climates in both countries offers one glimmer of hope for GC refiners.
Bottom line: the US is producing more liquid hydrocarbons then we have for decades. But US is still a net importer of liquid hydrocarbon. US refiners are currently producing all the products the US economy can consume at current prices. Supply is meeting demand…the demand that can meet current prices. So the real question become the effect on the domestic product price by exporting any US oil production regardless of its characteristics. In that regard US consumers are already competing with foreign consumers. If US consumers could outbid the foreign buyers all those products would remain in the country. But obviously the current price of those products is too high for the US economy to afford to buy all of the output. So those products are sent to foreign consumers that can pay. IOW regardless of where US oil production is or isn’t refined it doesn’t seem to me to have much bearing on what US consumers pay: we don’t buy oil…we but gasoline, diesel, etc. And we compete on a price basis with the rest of the global community for those commodities. So it doesn’t seem to be an critical factor for the consumers whether we export any liquid hydrocarbons or if we export a lot. In fact, motor fuel consumers might be benefitting from lower prices from Easter Canadian refiners that are importing cheaper feedstock from Texas.
In fact according to Canadian gov’t their Atlantic provinces exported about 7 million cubic meters of gasoline in 2012 while consuming about half that amount domestically. I couldn’t find details on who that gasoline is exported to but I think it’s a safe bet most if not all went to US consumers in the NE. It wouldn’t be going overseas since most of the world runs on diesel.
So the bottom line may be that some Canadian refineries are becoming surrogates for Gulf Coast refineries. If much of the production exported to Canada is imported back into the US in the form of refined products one might argue that production really hasn’t been exported per se. Just as the imported oil refined in the US with its products exported really isn’t US “imported oil”.
Northwest Resident on Thu, 3rd Jul 2014 11:34 am
“…if exports of gasoline and diesel (and condensate) continue to grow as American cars become more fuel efficient, then by the end of the decade the U.S. really could become a net exporter of petroleum.”
One IF, one COULD BE and one unproven definite.
The author states “as American cars become more fuel efficient” as if it is a given, and perhaps it is.
But that statement also presents as “unquestioned fact” that the fuel efficiency improvements of American cars ARE saving enough gasoline/diesel to grow the amount of gas/diesel/condensate exports.
And the basic point the author attempts to make, that auto fuel efficiency savings in America “could” someday render a net surplus for export just seems like a real stretch of the imagination.
This all seems very questionable to me.
But as an article that influences not highly analytical people to believe we have all the oil we’ll ever need, it does have “merit”.
JuanP on Thu, 3rd Jul 2014 12:28 pm
“Maybe then, when we’ve got more oil than anyone can figure out what to do with,…” LOL
There is so much BS to pick from in this article, it is unbelievable.
Please choose one, criticize, and enjoy!
shortonoil on Thu, 3rd Jul 2014 2:43 pm
During the eight years that I worked in Newfoundland as a mining consultant I became good friends with a number of people there. A weekend in Newfoundland is a weekend in St. Johns, and the social life is found among its many bars, and night clubs. St. Johns has one street that runs along the bay, and it closes one hour a day, seven days a week. To the Newfie partying is regarded with the same enthusiasm as breathing.
Some of the people I met in St Johns were American engineers working on the Hyberia project, and an American operations manager at the refinery that was about two hours north of the project I was working on. Everything in Newfoundland is two hours from somewhere else. On several occasions I visited the refinery. Refineries aren’t particularly interesting unless you like a 100 miles of pipe. They are all about temperature, and pressure. The refinery was build by the Americans during WW II to supply allied forces. It was assumed that it would be out of the ranch of German bombers, and as close to England as possible. Because Newfoundland is a BIG island everything has to be brought in by ship, or air.
When I was there they were converting the refinery to process crude from Hyberia; it was much lighter than the crude that was then coming out of the states. The Eagle Ford is generally divided into three parts. The northern region, where the wells are much shallower, is light crude API 45 to 50. The central area is rich gas condensate, and the southern region dry gas (see page 26 for map).
http://repository.tamu.edu/bitstream/handle/1969.1/ETD-TAMU-2011-08-9970/CHAUDHARY-THESIS.pdf?sequence=2
It is quite possible that that refinery is now processing EF crude, as the crude that comes out of the EF’s northern area would be quite similar to the crude the refinery has been processing for many years.
Haven’t been back to the “Rock” in several years, but if anyone wants to hire a consultant to make the trip, just let me know.
http://www.thehillsgroup.org/
synapsid on Thu, 3rd Jul 2014 2:48 pm
rockman,
Thanks for this.
rockman on Thu, 3rd Jul 2014 3:59 pm
NR – The basic problem with the ILLUSION of increased fuel efficiency of US vehicles is the incorrect focus on the mpg rating of new/future vehicles and not of the existing cars on the road. Couple of years ago I found the stat: despite new cars coming off the production line were more efficient the change in the average fleet mpg over the previous several years was a whopping 1 mpg. And that was per year but for the entire 3-5 year period. We’ve little efficiency gains in the EXISTING cars on the road. In 10+ years we should be seeing the impact of the better mileage vehicles being produced today.
We’re not burning less gasoline because the cars are more efficient. It’s because we are driving less due to the high price of fuel. Last time I saw the stats the drop in consumption correlates with the fewer miles driven.
Northwest Resident on Thu, 3rd Jul 2014 9:12 pm
rockman — Good info, and as I suspected. Unlike you I was a little too lazy (or too busy) at the time of my previous post to bother doing a little research to confirm my suspicions. But I suspected the gas mileage improvement leading to surpluses was a rotten fish — it sure smelled like it. It’s nice to know I wasn’t just imagining that stench. But hey, let’s just wait for ten years to pass, then we “could” have a surplus of oil/NG to export due to all the fuel efficiency savings — honest, Forbes says so and they wouldn’t lie to us, would they?! (snicker…)