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2014 Media Kit

Permian light crude stranded as US oil exports begin to flow

By: | at 03:38 PM | Intermodal   | International Trade  

Washington’s decision to allow exports of an ultra light crude offers a potential boon to U.S. producers that will bypass drillers in the Permian basin because the country’s fastest growing shale play lacks pipelines or affordable trucking.

The first exports of condensate have been from the nearby Eagle Ford Shale, a formation served by pipelines and rail, enabling producers to transport condensate to the coast.

Pioneer Natural Resources Co, a leader of the crusade to get Washington to allow the first condensate exports, has examined the economics and decided to ship from Eagle Ford, Chief Executive Officer Scott Sheffield said.

“(There are) no plans to export Permian condensate from plants,” Sheffield told Reuters in a recent interview. “By the time we truck it, it’s not worth the economics of exporting it. We would need pipelines to make it economic.”

The Permian’s rapid growth has made it a darling of shale producers. Some say it could produce at high rates for 30 years or more. Still, it mainly serves local refineries because of its isolation.

The possibility of selling condensate into higher priced foreign markets has opened opportunities for shale producers, giving value to an often unwanted byproduct. Discounts on Eagle Ford condensate, currently about $10 a barrel below WTI, could narrow quickly when exports increase, traders say. In contrast, producers in the Permian may face a continued drag on pricing.

Permian producers face two problems: pipeline operators do not want to transport condensate because it can contaminate batches of crude, and the cost of trucking is too high.

Logistics

Moving condensate from the Eagle Ford is easy because it is close to both Houston and the port of Corpus Christi. Producers have options to rail, truck or pipe oil to Houston-area refineries then move it along the coast or overseas.

But moving oil from West Texas is more difficult as pipelines in the region are already running near capacity and heavily geared towards transporting oil to Cushing, Oklahoma, the delivery point for the U.S. crude oil contract.

A number of pipelines set to start up later this year and early next may help alleviate bottlenecks. But traders say more capacity is needed.

Unlike Eagle Ford, Permian has no lines dedicated to condensate, noted Christopher Kopczynski, an analyst at Wood Mackenzie.

“Logistically, there are not any easy ways to get (Permian) condensate to the Gulf Coast outside of batching in the trunk lines,” Kopczynski said. Batching, or sending condensate in separate cargoes so it does not mix with other crude, can be difficult, he said.

Exporting Condensate

Earlier this year, Pioneer and Enterprise Product Partners LP became the first two companies to receive approval from the U.S. Commerce Department to export a form of stabilized condensate that had been lightly processed.

Oil producers hope the move could be a first step in ending a decades-old ban on U.S. crude exports. Several have looked into the possibility of exporting their own deeply-discounted condensate.

“There is more condensate produced in the Permian than ever before,” said Sandy Fielden of consultancy RBN Energy. “Up until now, people considered it to be a secondary product. There was production coming online and it was suffering from discounts. But, people are now interested. The problem (with the Permian) is getting the crude to market.”

Analysts say it is difficult to determine just how much condensate is produced in any play,. The Texas Railroad Commission, which collects reports from operators in the Permian, estimated that in 2013, some 4.6 million barrels of lease condensate, or 12,600 barrels per day, was produced in the region. This compares with just 2.9 million barrels or some 8,000 barrels per day in 2012.

Permian oil is getting increasingly lighter, and well completions in main zones have tripled year over year, allowing condensate production to continue a steep climb. (Reuters)