The Condensate Con: How Real Is The Oil Glut?
My favorite Texas oilman Jeffrey Brown is at it again. In a recent email he’s pointing out to everyone who will listen that the supposed oversupply of crude oil isn’t quite what it seems. Yes, there is a large overhang of excess oil in the market. But how much of that oversupply is honest-to-god oil and how much is so-called lease condensate which gets carelessly lumped in with crude oil? And, why is this important to understanding the true state of world oil supplies?
In order to answer these questions we need to get some preliminaries out of the way.
Lease condensate consists of very light hydrocarbons which condense from gaseous into liquid form when they leave the high pressure of oil reservoirs and exit through the top of an oil well. This condensate is less dense than oil and can interfere with optimal refining if too much is mixed with actual crude oil. The oil industry’s own engineers classify oil as hydrocarbons having an API gravity of less than 45–the higher the number, the lower the density and the “lighter” the substance. Lease condensate is defined as hydrocarbons having an API gravity between 45 and 70. (For a good discussion about condensates and their place in the marketplace, read “Neither Fish nor Fowl – Condensates Muscle in on NGL and Crude Markets.”)
Refiners are already complaining that so-called “blended crudes” contain too much lease condensate, and they are seeking out better crudes straight from the wellhead. Brown has dubbed all of this the great condensate con.
Brown points out that U.S. net crude oil imports for December 2015 grew from the previous December, according to the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy. U.S. statistics for crude oil imports include condensate, but don’t break out condensate separately. Brown believes that with America already awash in condensate, almost all of those imports must have been crude oil proper.
Brown asks, “Why would refiners continue to import large–and increasing–volumes of actual crude oil, if they didn’t have to–even as we saw a huge build in [U.S.] C+C [crude oil plus condensate] inventories?”
Part of the answer is that U.S. production of crude oil has been declining since mid-2015. But another part of the answer is that what the EIA calls crude oil is actually crude plus lease condensate. With huge new amounts of lease condensate coming from America’s condensate-rich tight oil fields–the ones tapped by hydraulic fracturing or fracking–the United States isn’t producing quite as much actual crude oil as the raw numbers would lead us to believe. This EIA chart breaking down the API gravity of U.S. crude production supports this view.
Exactly how much of America’s and the world’s presumed crude oil production is actually condensate remains a mystery. The data just aren’t sufficient to separate condensate production from crude oil in most instances.
Brown explains: “My premise is that U.S. (and probably global) refiners hit in late 2014 the upper limit of the volume of condensate that they could process” and still maintain the product mix they want to produce. That would imply that condensate inventories have been building faster than crude inventories and that the condensate is looking for an outlet.