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What Are The Implications

Last week (February 2013) EOG Assets informed analysts that most Eagle Ford oil manufacturing ought to be categorised as condensate fairly than crude oil. They backed up their assertion with a chart of production amount and API high quality indicating 70 percent of production is condensate. Present forecasts point out that translates to condensate manufacturing of over 500Mb/d in South Texas throughout 2013. Today we examine the proof that EOG offered.

As we have now discussed beforehand in RBN Energy blogs, condensate is lighter than crude oil. Whereas a traditional light sweet US crude like the US Midwest pricing benchmark West Texas Intermediate (WTI) crude has an API gravity of 39 and heavy crudes like Mexican Maya have an API gravity of 20, condensates have an API gravity between 45 and 70. [API gravity is a measure of density relative to water where liquids that sink in water have an API of 10 or lower and liquids that float on water have an API higher than 10]. The usually accepted delineation between condensate and crude oil is forty five API. Nevertheless, the lack of an agreed commonplace definition for Condensate is a problem for the business (see “Neither Fish Nor Fowl” and “Fifty Shades of Condensate – Which One Did You Imply ”).

Growing US home crude oil manufacturing – up by about zero.9 Mb/d throughout 2012 is mostly being produced by horizontal drilling and hydraulic fracturing strategies applied in shale deposits. The shale crude output is lighter in quality than most of the crude recovered using typical drilling methods. In truth an rising part of the shale crude oil output can be labeled as condensate. The Energy Information Administration (EIA) estimates about 11 p.c of US crude manufacturing in 2010 was condensate. That percentage could improve in oil refinery plant design jobs 2013 to about 14 percent of manufacturing or close to 1 MMb/d.

By all accounts the crude oil basin producing essentially the most condensate is the Eagle Ford. Nevertheless data telling us the proportion of crude oil to condensate within the Eagle Ford is deceiving at best and downright confusing at worst. A new analysis made available this past week by considered one of the biggest producer within the Eagle Ford – EOG Resources – throws a curve ball into the continued debate about how a lot condensate is being produced in Eagle Ford. The “official” rating keepers of the Eagle Ford production information are the Texas Rail Street Commission (RRC). The most recent RRC statistics tell us that January to November 2012 Eagle Ford manufacturing averaged 340 Mb/d of crude and 72 Mb/d of condensate or 17.5 % condensate. Most observers together with the RBN team believe that these numbers don’t reflect reality. They’re far too low.

For one thing, the statistics averages for the year to November 2012 and they’re based on data identified to lag precise production for months because of late reporting. It’s also the case that the RRC information is based on the honor system – and lets just say that might lead to some producers being “economical with the truth” about their condensate. That’s because crude entrepreneurs who purchase at the wellhead discount condensate. The posted price for 60 API Eagle Ford condensate averaged $17.5/Bbl below 40 API crude throughout 2012 (Source Plains postings – see Knocking on Heaven’s Door Part I for a full rationalization of the posted worth discount mechanism). In consequence, producers are nervous about telling buyers that their output is condensate because that makes it less worthwhile than crude oil. Up till now we had heard estimates that Eagle Ford production may actually be as much as 40 to 50 percent condensate. Lastly, a variety of Eagle Ford condensate seems to ‘disappear’ – blended off into the crude oil stream. To the extent that occurs it could show up on the RRC statistics as crude oil, not condensate. For all these reasons we’ve got discounted the RRC numbers. But when we can’t rely on the State of Texas, who can we depend on

How about EOG Final week one among the biggest producers within the Eagle Ford, EOG Sources, offered a chart at their quarterly earnings convention call implying that 7 out of 10 manufacturing corporations surveyed had been really producing 100 % condensate in the Eagle Ford -i.e. no crude oil. The data EOG offered (originating from a survey carried out by IHS) mentioned that for these 10 producers condensate represents 70 p.c of their whole crude and condensate production. We reproduce the chart below.

Source: EOG Earnings Convention Name Feb 2013 (Click on to Enlarge)
The chart reveals cumulative oil production on the proper axis and the API gravity of the production alongside the underside scale. The black dotted line on the chart is on the forty five API level that generally distinguishes crude oil from condensate. To the left of the dotted line the manufacturing is crude (purple baseline) and to the fitting it’s condensate (green baseline). The info on the chart is plotted as a collection of coloured dots representing EOG (giant yellow dot) and 9 competitor Eagle Ford producers (Co.1 to Co. 9). The height of the colored dots signifies the cumulative Eagle Ford manufacturing volume measured on the left axis – also written beside the dot. The horizontal position of the dot is the common gravity of that company’s crude and condensate manufacturing. Mainly the chart is saying that every company except EOG and two opponents has produced all their crude and condensate from the Eagle Ford as condensate.

The data is simpler to interpret in a desk type. Below we record the unidentified companies and their present each day Eagle Ford manufacturing as of October 2012 from the chart. If the company is to the left of the dotted line we counted the every day manufacturing as crude and it if was to the right we counted it as condensate. Our methodology will not be one hundred % accurate since the API degree indicated on the chart is based on complete cumulative manufacturing, not present production. However for our goal we’ll assume that current manufacturing reflects the historic average API stage – that is if they have been producing condensate all along then they are going to continue to take action. What the table shows is that together with EOG these firms had been producing between them 456 Mb/d in October 2012 and that 7 out of the ten firms have been producing condensate – a total of 319 Mb/d or 70 p.c of output – leaving solely 30 percent of output or 137 Mb/d as crude oil.

(Click to Enlarge)
The companies used within the IHS survey aren’t named (aside from EOG) however the October 2012 present manufacturing volume estimates on the chart (456 Mb/d) exceed the “official” RRC production numbers for YTD November 2012 – so the businesses do symbolize a big chunk of Eagle Ford production.

In impact EOG was telling traders listening in final week on the earnings name that the majority producers within the Eagle Ford with the exception of EOG and two other companies are just producing condensate with no crude oil.

If the data from IHS that EOG introduced is correct then the share of Eagle Ford crude that is condensate is much increased than beforehand assumed by the market. Which means there might be a lot more condensate showing up in Houston and Corpus Christi from the Eagle Ford than expected. Even if we assume that there was some try and make EOG look higher with these numbers by averaging cumulative manufacturing slightly than just looking at current output it will nonetheless be the case that the API gravity of Eagle Ford manufacturing is growing more than most everyone thought.

What are the implications First – as EOG implied on its earnings name – the returns for Eagle Ford condensate producers are likely to be lower than they could be if extra of their production was crude. Second all of the manufacturing from the Eagle Ford that makes its solution to Gulf Coast refineries will probably be very gentle and can challenge refineries geared up to handle heavier crudes or even “conventional” gentle sweet crudes (for more on this concern see Turner Mason and the Goblet of Gentle and Heavy). In response to the sunshine crude challenge refiners are already making new investments. In January 2013, Valero introduced a refinery improve due online in 2015 at their 160 Mb/d Houston refinery to permit it to run extra mild Eagle Ford crude. The refinery already runs mild candy crude however Valero is investing in a ninety Mb/d crude topper unit to separate out crude elements which are too mild before they enter the crude unit. Flint Hills is making a similar investment at their Corpus Christi refinery.

Underneath the circumstances one of the best marketplace for US condensate as we speak appears to be exporting it to Canada as diluent for heavy Canadian bitumen crude (see Plains Trains and Diluent Offers and It’s a Kinder Magic ). That market is expanding with increased bitumen production but transporting enough condensate to fulfill Canadian demand requires new pipeline capability – some of which is being constructed and some is of which continues to be waiting for allowing. We will look extra closely at the Canadian diluent supply scenario in an upcoming weblog.

Meantime as 2013 unfolds we will see extra Eagle Ford crude/condensate arriving at the doorsteps of Gulf Coast refiners (and increasingly East Coast refiners by tanker). To begin with – and that is already taking place – refiners will blend the light crude with heavier crude to make it palatable for his or her refineries (see Heaven Sent Mix). Other companies like BP have committed to utilizing the Kinder Morgan Galena Park condensate splitter (due on-line in 2014) to course of condensate into distillate and naphtha fractions – probably for export. That tactic neatly sidesteps federal regulations prohibiting the export of wellhead oil refinery plant design jobs condensate (see “Fifty Shades Lighter”).

If the IHS examine that EOG introduced last week is accurate then the amount of condensate on its solution to the Gulf will overwhelm existing refining capacity sooner slightly than later. Manufacturing forecasts by the tip of 2013 from the Eagle Ford vary from 850 Mb/d from RBC to over 1 MMb/d from Bentek. In both case even 60 % of that quantity as condensate would see 400 – 500 Mb/d of condensate hitting the market. In the event – excess condensate could have to find its approach to Canada – using rail if pipeline capacity will not be available.

So is all this fuss about crude or condensate based on the API gravity value worrying about If the IHS information that EOG offered is to be believed then at the least some corporations are being “economical with the truth” about how a lot condensate they’re producing. If that’s the case then clearly it is greater than just a storm in a teacup. The numerous overhaul of US crude oil infrastructure that’s underway as new Canadian and home production makes its way to the Gulf Coast is complicated and costly enough. We are pretty positive that refiners and shippers would like to have a greater understanding of how much crude or condensate is coming their means than the present guessing games recommend is the case.

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