{"id":1208,"date":"2014-07-15T13:42:55","date_gmt":"2014-07-15T18:42:55","guid":{"rendered":"https:\/\/allenergyconsulting.com\/blog\/?p=1208"},"modified":"2014-07-16T08:04:25","modified_gmt":"2014-07-16T13:04:25","slug":"condensate-economics-explained","status":"publish","type":"post","link":"https:\/\/allenergyconsulting.com\/blog\/2014\/07\/15\/condensate-economics-explained\/","title":{"rendered":"Condensate Economics Explained"},"content":{"rendered":"

Introduction<\/span><\/strong><\/p>\n

As discussed in my previous article<\/a>, the Oil & Gas Industry, producers in particular, are trying to export condensates.\u00a0\u00a0 The industry has recently gotten some exemptions<\/a>, and perhaps this may lead to more.\u00a0\u00a0 As noted in the previous article, this may not be the best policy decision for the US economy.\u00a0\u00a0 Constraining exports will allow the entrepreneurs and innovators to find ways to use the feedstock more effectively domestically.\u00a0 This will then create better economic multipliers versus shipping out the feedstock.\u00a0\u00a0 The restrictions do put an additional downward price pressure on the producers, forcing them to sell at more of a discount in order for the US refiners to take the condensate.\u00a0 However, the condensate will be sold at discount regardless of the export rule as explained in more detail below.<\/p>\n

The producers believe they can sell the feedstock more effectively in the global market.\u00a0 \u00a0This is yet to be proven.\u00a0\u00a0 Overall Condensate is not very valuable in terms of product yield relative to most crude oil.\u00a0 The US has already displaced a significant volume of international condensates which was being imported to the US as seen in the figure below.<\/p>\n

\"\"<\/a><\/p>\n

A large percentage of imports above 45 API are condensate.\u00a0\u00a0 The dramatic drop off is due to the explosion of condensate in the US from fracking, thereby displacing the imports that were coming to the US.\u00a0\u00a0 Wherever condensate goes, it will still have to compete on global basis plus shipping and the poor product yield.\u00a0 In fact, condensates yield a lot more gasoline than diesel and jet when refined.\u00a0\u00a0 Diesel is the primary product in the rest of the world compared to the US, which is mainly gasoline.<\/p>\n

There is lack of economic pricing discussion on condensate, including my previous piece.\u00a0\u00a0 This time I will present the economics of condensate to prove the points that condensate exports will not likely result in economic gain for the US.\u00a0\u00a0 The very first thing is to understand basic refining economics.\u00a0\u00a0 I am working on a new multi-client product \u2013 Oil Market Analysis (OMA).\u00a0 The first part of OMA will involve an oil refining index model.\u00a0\u00a0 This daily product will track and calculate the value of various crude oils through various refining configurations.\u00a0\u00a0 I am using the initial results from the model for this discussion.<\/p>\n

Analysis<\/span><\/strong><\/p>\n

There are three major configurations for refining \u2013 hydroskimming, cracking, and coking.\u00a0\u00a0 Each of them is progressively more advanced and costly.\u00a0\u00a0 Advancements come in two forms<\/p>\n

1. Increasing yield of products vs. residual product<\/p>\n

2. Increasing capability to process heavier and more complex crude.<\/p>\n

A good presentation on the various configurations can be found from Statoil<\/a>. \u00a0\u00a0From their presentation, they expected increasing complexity requirements from refineries.\u00a0\u00a0 The US refineries also believed this, and as a result have caused this predicament \u2013 too much condensate without an optimal home.<\/p>\n

Running OMA refining model for the USGC Light Louisiana Sweet (LLS), Maya (Mexico Heavy Crude Oil), and Eagle Ford Condensate shows the following result in each configuration using the average USGC 2013 prices for Gasoline, iso & normal Butane, Jet, Propane, Diesel, Naphtha, Residual Fuel Oil, and Petroleum Coke. \u00a0The value is essentially the revenue minus the variable cost obtain per barrel of feedstock. \u00a0If LLS was processed in a cracking refinery, in the USGC they could expect $115\/bbl of revenue per barrel. \u00a0 LLS averaged $106\/bbl in 2013 – therefore a USGC refiner running LLS should have produced a margin of $9\/bbl. \u00a0This is not weighted nor optimized. \u00a0An optimized refiner should have been able to extract more margin through better inventory management, purchasing, and offering a broader product suite.<\/p>\n

\"\"<\/a><\/p>\n

Takeaways<\/span><\/strong><\/p>\n

Increasing complexity increases the variable cost of the facility – largely energy cost.\u00a0\u00a0 The value of increasing complexity is more apparent when the crude oil is heavier.\u00a0\u00a0 LLS is 66% lighter than Maya.\u00a0\u00a0 \u201cEagle Ford\u201d Condensate is about 277% lighter than Maya.\u00a0 Therefor, light crudes such as condensates cannot benefit from the increase complexity.<\/p>\n

Refineries do not get much value from processing condensate as seen in the table above.\u00a0\u00a0 Refiners are likely asking for significant discounts relative to LLS in order to process the condensate.\u00a0 The marginal refinery in the USGC is the cracking refinery.\u00a0 Given this market dynamic, the market should have priced the condensate around a $9\/bbl discount to LLS.\u00a0 IF <\/strong>the export market marginal refinery unit is a hydroskimming, then perhaps a $5\/bbl discount is possible.\u00a0 Given the shipping cost, the discount to condensate will still likely be greater than $7\/bbl, even if exports were allowed.\u00a0 It is possible to create a mixture of heavy crude oil and condensate, thereby creating an optimal blend for cracking refinery to be cost competitive with a coking refinery.\u00a0 This could reduce some of the discount for the condensate.\u00a0 This would be a more sustainable path for delivering maximum value vs. trying to export the condensate.\u00a0 In addition, market forces would likely create a mechanism to capture the condensate discount.\u00a0 Many have turned to splitter projects.\u00a0 I don\u2019t believe splitters would be a sustainable solution.\u00a0\u00a0 Splitters will just flood the market with more unfinished product,s e.g. Naphtha.\u00a0\u00a0 Naphtha prices are already under so much pressure.\u00a0 Naphtha eventually will have to be processed to produce finish product.<\/p>\n

Conclusion<\/span><\/strong><\/p>\n

In the end, exports may reduce the discount to Condensate by a few dollars.\u00a0\u00a0 Those dollars will not likely show back up as a significant saving for the US consumer.\u00a0\u00a0 The producers will benefit the most from the ability to export and find market arbitrages.\u00a0\u00a0 The many that chose to do splitter projects will likely not fare as well as the feedstock discount may not keep up with unfinished product decline in prices.\u00a0 The condensate discount will likely continue to be greater than $7\/bbl relative to LLS.\u00a0 There is still room to formulate a better refinery blend and even expand the US refining capability by adding a condensate refinery.\u00a0 (I do know a 80,000 b\/d condensate refinery that can be brought back to life for $800 million in 18 month time projected IRR 30+% \u2013\u00a0email me if you are interested<\/a>)<\/p>\n

Please do consider All Energy Consulting for your refining market analysis.\u00a0 We have many years of practical experience and now offer a dynamic market refinery model.\u00a0 Please email me if you are interested in hearing more about Oil Market Analysis (OMA) \u2013 dkb@allenergyconsulting.com<\/a><\/p>\n

Your Digging Beyond Skin Deep Energy Analyst,<\/p>\n

David<\/p>\n

David K. Bellman
\nAll Energy Consulting LLC- “Independent analysis and opinions without a bias.”
\n614-356-0484
\ndkb@allenergyconsulting.com
\n<\/a>@AECDKB
\nblog:\u00a0 https:\/\/allenergyconsulting.com\/blog\/category\/market-insights\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Introduction As discussed in my previous article, the Oil & Gas Industry, producers in particular, are trying to export condensates.\u00a0\u00a0 The industry has recently gotten some exemptions, and perhaps this may lead to more.\u00a0\u00a0 As noted in the previous article, this may not be the best policy decision for the US economy.\u00a0\u00a0 Constraining exports will […]<\/p>\n","protected":false},"author":1,"featured_media":14,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,26],"tags":[298,96,297,123,294,296,293,91,295],"class_list":["post-1208","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-insights","category-oil-petroleum-products","tag-coking","tag-condensate","tag-cracking","tag-crude-oil","tag-crude-oil-evaluation","tag-hydroskimming","tag-refinery","tag-refining-margins","tag-splitter"],"_links":{"self":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1208","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/comments?post=1208"}],"version-history":[{"count":8,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1208\/revisions"}],"predecessor-version":[{"id":1213,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/posts\/1208\/revisions\/1213"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media\/14"}],"wp:attachment":[{"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/media?parent=1208"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/categories?post=1208"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/allenergyconsulting.com\/blog\/wp-json\/wp\/v2\/tags?post=1208"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}