September 18, 2014 / 6:01 PM / 6 years ago

Record output, exports amid U.S. condensate boom: Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

Snow covered transfer lines (C) are seen leading to storage tanks (rear)at the Dominion Cove Point Liquefied Natural Gas (LNG) terminal in Lusby, Maryland March 18, 2014. REUTERS/Gary Cameron

By John Kemp

LONDON (Reuters)-Natural gas liquids are the fastest-growing section of the U.S. oil and gas business, with production and exports setting new records in the second quarter of 2014, according to government statistics.

The business attracts far less attention than crude oil or natural gas because of the bewildering array of definitions employed when talking about natural gas liquids and the patchwork of fragmentary statistics on their production.

It became briefly famous in June, however, following news reports the Commerce Department had given permission for two companies to export condensates, one sort of natural gas liquids, which had been only minimally processed.

The decision sparked a political storm about whether it heralded the end of the four-decade old ban on U.S. crude exports.

But even before the ruling, the United States was already exporting record quantities of natural gas liquids (NGLs), a term that includes ethane, propane, butane, pentane and natural gasoline, all small hydrocarbon molecules with between two and eight carbon atoms.

According to the U.S. Energy Information Administration, the United States exported 171 million barrels of NGLs in 2013, almost half a million barrels per day, up from just 26 million barrels in 2007.

By the second quarter of 2014, exports had hit a record of more than 700,000 barrels per day, and the pace was quickening.

NGLs are in high demand across Latin America and Asia for cooking and heating, motor fuel, and as feedstock for making petrochemicals.

Exporting U.S. NGLs has become big business for oil and gas producers like Shell and BP as well as trading companies like Vitol, Trafigura and Mercuria.

PLETHORA OF NAMES

NGLs come from three main sources which affects what they are called and how they are treated for legal purposes, even if they are chemically similar.

Some NGLs are separated from gas wells at or near the well head, using fairly simple field separation equipment, in which case they are known as lease condensate.

A second source is the natural gas processing plants which treat gas to meet pipeline specifications before it can be put into the interstate transmission system, where the NGLs are commonly called natural gas plant liquids (NGPLs).

The third source is from oil refineries, where light hydrocarbons are boiled off at the top of the distillation column, and usually called liquefied refinery gases (LRGs).

Lease condensate, NGPLs and LRGs are all chemically similar (though lease condensate tends to contain a higher proportion of heavier hydrocarbons like pentane and natural gasoline while NGPLs and LRGs contain more ethane, propane and butane). However, the regulatory treatment is very different.

There are no restrictions on the export of LRGs, which can be sent abroad like other refined petroleum products like gasoline and diesel. But the export status of NGPLs and especially lease condensate is much less clear.

Lease condensate in particular would normally be considered to be crude oil and prohibited from export, though the Commerce Department ruling has thrown this into doubt by implying that a relatively modest amount of processing could make it export-ready.

To add to the confusion, the U.S. Energy Information Administration does not consider lease condensate to be an NGL (classifying it as crude oil instead) while most state authorities include lease condensate as well as NGPLs in their own definition of NGL output.

BOOMING PRODUCTION

By whatever name they are known, the production of NGLs is increasingly rapidly thanks to the shale boom.

The problem for the NGL industry is that most of the increase in output is coming from lease condensate and NGPLs, rather than easier-to-export LRGs.

Plunging gas prices have compelled many drillers to shift their focus from fields which produce mostly dry gas to those which produce more liquids in order to survive.

Gas drilling has shifted from dry gas plays like the Barnett Shale in Fort Worth to liquids-rich wet gas plays like Eagle Ford, both located in Texas.

The result has been an enormous increase in the amount of NGLs produced from both gas plants and field separators.

NGL production in Texas soared by 43 percent between 2010 and 2013, according to the Railroad Commission, with the fastest growth coming from field separators rather than gas plants.

In 2010, NGLs accounted for about 6.8 percent of all gas production in Texas by volume, but by 2013 the percentage had risen to 9.3 percent, as gas production switched to wet gas plays.

The profits from selling of NGLs explain why Texas gas production has continued to rise despite depressed prices for natural gas itself.

For the country as a whole, NGL production from gas plants has risen 25 percent since 2010 and 43 percent since 2007, according to the EIA.

There are no comparable national statistics for lease condensate, but production is likely to show similar if not larger gains.

With output of NGLs rising so swiftly, developing export markets is essential to absorb all the extra production.

But with uncertainty about the export status of lease condensate and some NGPLs, there is a lot of confusion about what exactly can be sent abroad, which explains why many firms want the rules clarified - preferably by lifting restrictions on NGL exports altogether.

Editing by William Hardy

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