By John Kemp
LONDON, June 27 Soaring output of light
condensate in the United States has crushed refining margins for
naphtha and added to the global gasoline surplus.
But it is also providing a boost to Canada's oil industry,
which increasingly benefits from a captive source of the diluent
needed to make bitumen and heavy oil flow through processing
facilities and pipelines.
In the past two years, collapsing gas prices have forced
drilling companies in the United States to shift from targeting
dry gas fields to liquid-rich plays containing a mixture of gas
and more valuable crude oil and condensate to keep paying the
The result has been an upsurge in output of very light
liquid fuels variously described as light condensate, drip gas,
pentanes plus or natural gasoline, which compete head one with
the light naphtha traditionally produced by oil refineries, an
essential component in the production of both motor gasoline and
The sudden increase in availability of light hydrocarbons
like pentane (which has five carbon atoms) and hexane (six
carbon atoms) has crushed refining margins for light naphtha in
North America, and added to downward pressure on the naphtha
It is also worsening the global refining imbalance, which is
producing too much gasoline and not enough diesel, pushing
gasoline prices to a discount and worsening the outlook for
older refineries in North America and Europe.
As U.S. prices for naphtha and natural gasoline fall, more
and more of the surplus condensate is being exported to Canada
for use in the production and transportation of bitumen and
heavy crude oils, where it is being added as a diluent to
improve viscosity and help them flow more easily through the
processing and pipeline system.
In the first three months of 2012, the United States
exported 10 million barrels of "pentanes plus," almost all to
Canada, compared with less than 1 million barrels in the
corresponding period last year, according to the Energy
Information Administration (EIA), the independent statistical
arm of the U.S. Department of Energy.
EIA defines pentanes plus as "a mixture of hydrocarbons,
mostly pentanes and heavier, extracted from natural gas.
Includes isopentane, natural gasoline, and plant condensate."
Exports seem set to rise further. On June 5, Kinder Morgan
Energy Partners announced it had secured binding
commitments to transport more than 100,000 barrels per day of
light condensate (pentanes plus) for at least ten years on its
Cochin pipeline from the U.S. state of Illinois to Fort
Saskatchewan in Alberta, Canada ().
At present, Cochin transports propane and propane-ethane mix
from Canada to the United States. But as U.S. gas output surges,
demand for Canadian exports has fallen and the line is operating
at a fraction of its rated capacity. Meanwhile, rising output of
bitumen and heavy oil in Canada requires increased imports of
light condensate to dilute the viscous crude.
"The Canadian National Energy Board is projecting a need to
import over 180,000 barrels per day of pentanes plus into Canada
by 2014. By 2020 and 2025, the import demand for light
condensate is projected to grow to over 330,000 barrels per day
and over 450,000 barrels per day, respectively" according to
"The projected import demand will exceed the currently
available pipeline capacity by the end of 2014, creating an
opportunity for the conversion of existing, underutilized
pipeline capacity to meet the growing market demand" ("Notice of
binding open season for the Cochin reversal project" April 24,
From July 2014, subject to regulatory approvals, Kinder
Morgan is proposing to reverse the flow on Cochin to transport
light condensate northwards, and link it up with the Explorer
pipeline, bringing light products up from the fast-growing shale
gas and oil fields along the U.S. Gulf Coast, including the
Eagle Ford formation in Texas.
The Cochin reversal, new tank facilities and the link to
Explorer will allow light condensate from Eagle Ford and other
liquid-rich plays to be sent directly to oil sands producers in
Ironically, Canada's oil sands producers benefit from a
captive source of supply. U.S. regulations banning the export of
crude oil also apply to lease condensates and drip gas, which
means they cannot normally be sent to other countries but may be
exported to Canada for consumption or use therein owing to a
special exception for the country's northern neighbour (15 CFR
Exports are increasingly critical for the U.S. condensate
market. In the second half of 2011, U.S. stocks of pentanes plus
surged to over 17.5 million barrels, exceeding previous highs
set in 2010 and 2007, and far above normal levels of 6-10
million barrels. By the end of March 2012, commercial stocks of
light condensate were still at almost 16 million barrels (Charts
Stocks would have risen even more strongly were it not for
the surge in exports to Canada (Charts 3-4). Even so, oversupply
has helped push cash prices for light condensate and natural
gasoline to a steep discount against regular refinery-produced
gasoline, which contains other heavier molecules such as octane
Predictably, rising output of light condensate is putting
downward pressure on margins for refinery-produced light
naphtha, which has traditionally been blended into regular motor
gasoline, as well as being used as a feedstock for
petrochemicals, and a diluent for heavy crude transportation.
It also worsens the global imbalance between gasoline and
diesel production. Motor gasoline is a mix of hydrocarbons with
mostly four to twelve carbon atoms while diesel fuel generally
contains a mixture of slightly heavier molecules with between 8
and 21 carbon atoms.
Policies to promote the use of diesel rather than gasoline
in Europe, coupled with growing demand for diesel in emerging
markets, and rising production of condensate around the world,
have resulted in refineries producing too much gasoline and not
The sudden increase in U.S. pentane and hexane production is
worsening the imbalance, adding extra molecules to the gasoline
pool, while doing nothing to relieve the shortage of heavier
molecules in the diesel segment.
Much of the extra U.S. condensate will be used in
transporting bitumen and heavy oils from Canada. Some will be
lost as a result of evaporation in the pipelines. More will be
lost in refining. But most will ultimately be recovered when the
diluted heavy oils are passed through a U.S. refinery, adding to
the gasoline/naphtha pool glut.