This blog is adding on top of our previous blog, discussing the latest release of the Annual Energy Outlook 2012 (AEO 2012) by the Energy Information Agency (EIA). Shale gas revolution encompasses not only natural gas, but a glut of liquids from condensates to natural gas liquids (NGL). Shale gas is not only impacting the natural gas markets, but has and will impact the chemicals and refining markets. The AEO 2012 shows an increase of only ~600 kbd of NGL from 2010 to 2020. This is a very conservative number. In terms of condensate, the AEO does not break it out, but crude oil and condensates grow only 1.3 mmbpd. In the write up, much of the growth is a function of tight oil not condensates. Once again, I believe this to be almost too conservative.
In order to justify this stance, one can examine the many recent assessments done by the USGS. Adding up just the Eagle Ford, Marcellus, and Permian assessments; the mean NGL technically recoverable volumes total over 6 billion barrels. According to USGS, they have places the condensates into the NGL category. Liquids are clearly driving the shale gas production. Gas is almost becoming a loss leader. As I discussed in my previous blog, there are multiple projects focused on expanding the infrastructure in order to monetize the NGLs coming from these shale plays. One of my estimates of NGL and condensate additional volumes for 2020 compared to 2010 would be an increase of 2 mmbpd.
With this much volume of light feedstock, the US refining markets will see a drastic change. A historical given was the crude slate was going to get heavier requiring more and more conversion capacity. With the amount of NGL and condensates, the US market could potentially see a pause to this belief is inevitable if not a reversal from this trend. Much of the refining capacity has been designed to process heavy crudes not light feedstock. Refining margins from a highly complex refinery will not be pretty. Perhaps many have come to this thinking with all the refining closures and selling announcements. Simple condensate splitters economics would not bode well either, as a surplus in naphtha will likely occur. NGL and condensates will need to find a home. A re-configuration of existing refineries will come at significant losses to the current owners. There will be winners. Those who have access to capital and can think outside the box will win. The consumers will also be a big beneficiary of refining margin compression.
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