The oil and gas industry awaits greater clarification from the US Department of Commerce's Bureau of Industry and Security (BIS), which recently issued private rulings for two companies concerning condensate specifications and possible exports.
Charles T. Drevna, president of American Fuel & Petrochemical Manufacturers, told OGJ that the market "tremendously overreacted" during June 25 trading after what he called some erroneous news reports that the BIS rulings implied a loosening of the longstanding US ban on crude oil exports.
Even though Commerce officials emphasized that there was no change in policy, stock prices declined during June 25 trading for some refiners including HollyFrontier Corp., Valero Energy Corp., Marathon Petroleum Corp., and Phillips 66.
"The floodgates are not opening up to export crude," Drevna said. "I don't even see any condensates [from the BIS rulings] leaving the US for a while."
Pioneer Natural Resources Co. and Enterprise Product Partners LP had requested private rulings. PNR asked whether its South Texas Eagle Ford condensate qualified as being processed and was eligible for export without a special license (OGJ Online, June 25, 2014).
"When you start talking condensate, definitions vary," Drevna said. "Producers are going to Commerce to see if they have a product that qualifies for export."
He expects more producers will request similar private rulings, which are considered to be confidential and for which few details are made public.
Drevna believes Commerce will have to define specifically what qualifies as condensate. US unconventional plays have yielded a glut of light oil and condensate that Gulf Coast refineries, configured primarily to run heavy crudes, have been unable to process without plant modifications.
But Drevna warned that it would be wrong to assume US refineries cannot take any more light, sweet crude.
"We are adaptable creatures. We can adjust," Drevna said of refiners. "Refineries don't stay static, we adjust all the time."
PNR elaborates
Currently US crude exports are restricted and subject to licensing requirements under the Export Administration Regulations (EAR), which is administered by BIS. EAR restrictions on crude exports do not apply to hydrocarbons that have been processed through a distillation unit, PNR said.
"The stabilization process at [PNR's] Eagle Ford shale central gathering facilities involves a distillation unit that lowers vapor pressure and removes volatile lighter hydrocarbons," the company said in a statement to OGJ.
Earlier this year, PNR met with BIS representatives and later filed a submission under BIS's standard commodity classification process.
"BIS recently confirmed our interpretation that the distillation process by which our Eagle Ford shale condensate is stabilized is sufficient to qualify the resulting hydrocarbon stream as a processed petroleum product eligible for export without a license," PNR said.
PNR is one of the largest producers in the Eagle Ford with net production of more than 43,000 boe/d.
"A large proportion of Pioneer's production in the Eagle Ford shale is condensate, an ultralight hydrocarbon generally characterized as having an API gravity of 50° or higher," the company said. "This condensate is stabilized in central gathering facilities to meet industry standards for safe storage and transportation."
Questions linger
John Auers, a consultant with Turner, Mason & Co. of Dallas, said the BIS rulings constituted a broader definition of distillation than many in industry assumed.
"We always knew that if it ran through a distillation unit or a splitter, it's a product. This just moved it one step down," if a stabilizer tower in the field counts as processing eligible for export, Auers said.
He said the private ruling could derail some plans for splitters that turn condensates into naphthas, especially proposed splitters that have yet to receive financing and for which construction has not started. "It changes the plans," Auers told OGJ in a phone interview on June 30. He also noted that BIS could provide more elaboration in the future that might change his initial interpretation of the ruling.
Warren Russell and Michael Cohen of Barclays Capital Inc. issued a June 27 research note saying much uncertainty remains about the BIS commodity classification and its implications for other producers. They said most of industry considers oil above 45° API as being condensate.
"According to the Energy Information Administration, the Gulf Coast region, which includes the Eagle Ford, makes up roughly half the total 45° API production and is arguably the most viable source for exports due to its proximity to the coast," Russell and Cohen said.
"Condensate production from this region, which should grow by 125,000 b/d to 815,000 b/d in 2014, could potentially be exported if run through the same stabilization process that [PNR] described and if the trade makes economic sense," they said.
But they also noted that not all 815,000 b/d would be available for potential export because US demand exists for condensate for use in splitters and for blending.
"It is apparent, however, that producers see opportunities in the export market. Depending on where arbitrage opportunities exist, this condensate could find a home in Asia and potentially Europe, where petrochemical demand continues to increase," the Barclays research note said.
Wood Mackenzie analyst Afolabi Ogunnaike in Houston said he believes Latin America and Europe are the most likely buyers for US condensate exports. Ogunnaike told OGJ that Asia buyers are possible for US condensate but that transportation costs to Asia would be higher than to Latin America and Europe.