Market intelligence: US condensate export ruling weighs on refiners

04 July 2014 10:13 Source:ICIS Chemical Business

Reactions to the decision have run the gamut, ranging from forecasts of minimal impact, to it being the first step towards the US becoming a major player in the global crude trade

The ruling by the US Department of Commerce to allow two companies to export processed condensate made headlines across the world and brought headaches for those investors who owned stock in US refiners such as Valero and Phillips 66.

Meanwhile, equity prices of the two companies set to initially benefit from the decision – soon-to-be condensate exporters Enterprise Products and Pioneer Natural Resources – have risen.


Limited US condensate exports set to begin

Copyright: Rex Features

The condensate, or ultra light sweet crude oil, was allowed to get around the long standing ban on US crude exports due to it being put through a stabilisation process which involves a distillation unit that removes volatile lighter hydrocarbons such as natural gas liquids (NGLs).

Such stabilisation puts condensate into the realm of refined products, which have no restrictions on their exports from the US.

Reactions to the Commerce Department decision have run the gamut, with pronouncements from some that the decision will have little effect on global or US crude prices, to others proclaiming that the announcement is the first step towards the US becoming a major player in the global crude trade.

The true outcome will be unknown for a while. News reports have Enterprise and Pioneer pretty much ready to export condensate right now, and surely other producers and exporters will look to follow suit, as condensate production in shale regions such as the Eagle Ford in south Texas continue to rise.

Still, US exports of condensate likely will not constitute a seismic change in the global crude trade.

According to the Energy Information Administration (EIA) and global credit rating firm Moody’s, US condensate production for 2014 is forecast to be about 700,000 bbl/day, or less than 10% of the about 9m bbl/day of the crude oil production expected for the nation this year.

Meanwhile, the International Energy Agency (IEA) has forecast global crude demand for 2014 to be almost 93m bbl/day.

What has proven to be certain in the short term is that investors and analysts alike have turned bearish on US refiners in the wake of the condensate decision.

In an investors note on 30 June, Moody’s said that Valero, Phillips 66 and Marathon Petroleum will likely see lower returns on their investments or cancel projects due to growing processed condensate exports and narrowed discounts for the product.

“The rulings are credit positive for US oil and gas producers, and negative for refiners,” Moody’s wrote. “They do not open the door to crude exports and have only a modest effect on the country’s oil and gas sector because condensate production is a still small, but growing, portion of total US crude oil output.”

But those refiners working on building condensate splitters to produce naphtha, distillate and residue might be forced to cancel such projects due to reduced margins, the credit rating firm said.

Equity research firm Jefferies noted that condensate splitters “require a significant condensate discount to generate adequate returns. If condensate exports tie US condensate prices more closely to Brent prices, it could limit further investments in splitter capacity and consequently limit US co-product naphtha production,” noted Moody’s.

“Given that condensate production is expected to outpace announced splitter capacity additions by [about 1.5m bbl/day] by the end of the decade, the outcome will hinge on both how generous new regulations might be and the cadence of export capacity investments,” it added.

Midstream companies could be affected positively or negatively, Moody’s said, with firms such as Enterprise coming out winners while those with condensate splitters located inland and not near shipping ports faring poorly.

But not as poorly as US refiners, who have been profiting off the exports of fuel products refined from advantaged crudes in recent years but now face the possibility of those advantage crudes losing their advantage in the global market, Moody’s said.

“The refining and marketing industry in general faces a risk of incremental regulatory changes over several years that initially allow for small, and later gradually increasing, US exports of light crudes. Upstream producers could also look to minimally process their crude production in order to qualify for export under existing regulations,” Moody’s said.

“The prospect of increased crude exports would weaken US refiners’ cost advantage over refiners in Europe and Asia, which pay higher prices for crude,” Moody’s added. “Yet, even without a change in the rules, heightened market concerns about shifting sentiment over crude exports are likely to briefly reduce refining US refiners’ spreads and increase their cash volatility.”

By Jeremy Pafford