Following Long Ban, U.S. Could Dominate Global Light Oil Supply

After decades of isolation, the United States is set to become a major player in the global trade of ultra light oil as recent government export approvals attract interest across the world.

Following rulings disclosed this week, U.S. companies can now export the light, gaseous petroleum known as condensate after a forty-year ban, giving them access to needy markets in Latin America and Asia and potentially threatening the dominance of other established producers in the Middle East and Africa.

Companies are ready to ship condensate from some of the United States' massive oil and gas fields within weeks. By the end of the year, as much as 300,000 barrels could be exported each day, according to analysts at Citi in New York, a timely event as Asian countries increase capacity to import and exporters elsewhere face headwinds.

“It could have an enormous impact,” said Al Troner a condensate expert and president of Asia Pacific Energy Consulting. “It could happen within the next two weeks.”

Up to one million barrels of condensate is produced each day in the United States, all of which can be exported after some basic refining to reduce volatility, known as stabilizing, according to the U.S. ruling. That is double the amount exported by Qatar, the world's leading condensate producer.

The amount exported and where it goes depends on the kind of condensate that is produced and whether it is the right grade to feed petrochemical plants in China or Japan or to dilute heavy crude produced in Latin America.

Enterprise Products Partners and Pioneer Natural Resources this week both said that they have received private go-ahead from the Commerce Department to export condensate. Enterprise said it is ready to start exporting anytime.

Exports of condensate, a major feedstock for the petrochemical industry, will provide the first outlet for the vast amounts of oil and gas now produced in the United States. It will also give an inkling of the impact that a U.S. drilling boom could finally have abroad if other types of crude are approved for export.

Buyers are already interested, not just in nearby Latin America – the closest destination for U.S. condensate – but further afield in India and east Asia, traders and sources said.

In Latin America, companies could use condensate as a substitute for naphtha to lighten local heavy crude. Venezuela's state-run oil producer PDVSA and firms operating in Colombia including Ecopetrol and Pacific Rubiales, some of which already buy from West Africa, are “lined up waiting to buy light crudes and condensates if the price is right” said one trader working in crude purchases, speaking on the condition of anonymity.

In India, Essar Oil's chief executive L K Gupta said “we will look at buying condensate from the United States if the pricing is right. We do buy condensate and if a new source is opening up that is good for us”.

It is unclear what the cost of U.S. condensates would be, given that the price depends on the density and where it is produced. Some condensate from the Eagle Ford play in Texas does appear to be cheaper than some grades currently exported from Australia's North West Shelf, according to traders and Reuters data.

“According to an internal analysis at our company, the U.S. condensate based upon (U.S.) WTI pricing appears to have cost competitiveness compared with those from the Middle East based upon Dubai crude,” said one Seoul-based refining source, adding that competitive U.S. exports could help bring down global prices.

LENGTH TO TIGHTNESS
The Middle East dominates supply of condensate. Qatar and Iran export 760,000 barrels per day combined, about half daily global supply, according to a presentation in November by analysts at Facts Global Energy. Australia and Africa make up most of the rest.

The majority of supply heads to Asia, where importers like China, Japan and South Korea have build processing plants known as splitters that can turn condensate into naphtha and other oil-related products. In Asia Pacific, splitters can process up to 900,000 barrels per day of condensate, according to Facts.

But as demand rises, production from existing exporters is faltering. In Australia, where condensate is a by-product of liquefied natural gas production, exports are already declining in part because new gas produced is “drier” than before. In Qatar, domestic demand is set to slow exports. Iranian output has been hampered by sanctions.

“The condensate market East may move from length to tightness,” the Facts report said.

It remains to be seen if the United States can fill the gap, and it is expected to take time to determine whether U.S. condensate is compatible with Asian importers' needs. Some said that no moves have been made to export condensate to Asia from the United States. Sampling could take months, others said.

But with demand on the rise, the United States could offer unexpected respite.

“What we hope is this (U.S.) export will help pull down prices of shipments from the Middle East as overall supplies in the global market increase,” the Seoul-based refinery source said.

REUTERS