WASHINGTON — The Commerce Department’s decision to allow two Texas companies to export a minimally distilled variety of ultralight oil is a win for Eagle Ford Shale crude producers, at the expense of refiners and companies planning to build processing plants along the Gulf Coast.
The agency effectively declared those types of ultralight oil — called condensates — are a petroleum product free for export as long as they have been run through a distillation tower. The ruling is likely to change the economics of some of the Gulf Coast’s more expensive processing plants.
Magellan Midstream Partners, Kinder Morgan Energy Partners, Total and Targa Resources Partners all have built or announced plans to build such splitters in Texas in a bid to capitalize on the flood of ultralight condensates coming out of the Eagle Ford Shale and the 39-year-old ban on most crude exports.
Because unprocessed condensates are barred from export under that ban, the splitters have been viewed as one option for taking that condensate and producing naphtha, gasoil and other products that can, in turn, be transformed with additional materials into gasoline and diesel.
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But the potential value of those splitters is undermined by any broad changes in the crude export ban — or even modest rulings that allow Eagle Ford oil producers to sell lightly processed condensate after running it from the wellhead to their own nearby, much cheaper, distillation towers.
“This will put the announced condensate splitters at risk,” Wood Mackenzie analysts wrote in an email Wednesday, adding that the move jeopardizes 450,000 barrels per day in announced condensate splitting capacity.
Analysts at Tudor, Pickering, Holt & Co. told clients the Commerce Department rulings likely will put a chill on the announced splitter projects.
Although Total’s Port Arthur splitter is already up and running, several others were expected to go online in the next few years.
Kinder Morgan said the Commerce Department rulings would have “no impact” on its planned facility near the Houston Ship Channel that is slated to go online in November and is supported by long-term, fee-based contracts.
Splitters are less expensive, easier to permit and can be built much more quickly than large refineries, which may cost $10 billion and up. By contrast, Magellan said it expected to have a planned Corpus Christi splitter online and running by late 2016 at a price of about $250 million.
Small-scale distillation towers that can be located near active wells are much cheaper than both options, costing just tens of millions of dollars, said John Auers, executive vice president of Dallas-based consultancy Turner, Mason & Co.
“While splitting is less capital-intensive than refining, new light distillation units are closer to stabilization units,” Tudor, Pickering, Holt & Co. analysts said in a note to clients. This “decision likely puts further splitter projects on ice.”
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Refiners, too, were feeling some pain in trading early Wednesday, on expectations that any move to ease the export of condensate — whether straight from the field or lightly distilled — could lift the price for domestic crude they now buy at a steep discount.
Stock prices for San Antonio-based Valero Energy Corp. and Tesoro Corp. and a host of other refiners fell in trading Wednesday. Valero shares were down 9.6 percent to $50.62 midday and Tesoro had fallen 5.5 percent to $57.52. Phillips 66 was trading down 4.6 percent at $81.03, Marathon Petroleum Corp. was down 7.4 percent to $80.05 and HollyFrontier Corp. was down 8.3 percent to $44.90.
Even limited condensate exports are a win for U.S. exploration and production companies and a loss for downstream refiners, said Tudor, Pickering, Holt & Co. analysts.
But Andy Lipow, president of the Houston consulting firm Lipow Oil Associates, said refiner stocks had sunk so low because the market is misinterpreting the government’s action as a first step toward broad crude exports.
“They’re getting hammered because the market is interpreting this as a break in the dam,” Lipow said, adding swiftly: “I’m not saying I agree with it.”
Even so, gasoline and distillate futures prices are down in trading — suggesting that industry-funded reports are right in predicting additional U.S. oil exports could lower gasoline prices over time.
West Texas Intermediate oil, the U.S. benchmark, was trading at $106.12 midday, still almost $7 less than its international counterpart, Brent crude.
Analysts suggested that significant changes in crude prices aren’t expected over the short term and said the longer-term impacts will depend on how many companies take advantage of the government’s ruling effectively blessing export of barely processed condensate.
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