Since the report came out, we have received an unusually large number of questions relating to the quality of U.S. crude oil growth. Most of the questions have boiled down to the following:
Are the reported incremental crude oil volumes "crude oil proper" or NGLs?
If the growth is dominated by NGLs and condensate, is such growth real?
Oil Analytics' brief response is:
- The reported crude oil volumes are indeed crude oil, they are not NGLs.
- Growth in crude oil production is not dominated by condensate. In fact, in the last 12 months, U.S. crude oil production remained reasonably stable in terms of its API gravity mix.
- The growth in U.S. crude oil production is real and accelerating.
These questions revealed an apparent need to clarify certain industry terms and warn against a fresh swarm of "myths" about shale oil.
NGLs are not crude oil. Generally, crude oil and NGLs are distinctly different product categories that are difficult to confuse. They are results of very different industrial processes. Furthermore, crude oil and most NGLs have critically different physical properties.
On the other hand, condensate is crude oil and the EIA does include lease condensate in its reports of crude oil production. Generally, the term "condensate" refers to hydrocarbons that exist in gaseous phase-in underground petroleum reservoirs but condense into liquid at atmospheric pressure and are recovered by the separator. However, the term also can have more rigorously defined meanings, depending on the context.
Let's review the definitions in greater detail.
Crude oil is a complex, natural mixture of hydrocarbons and other chemicals that's extracted from an underground petroleum reservoir. The word "crude" stands for "unprocessed." The mixture typically includes a very wide range of hydrocarbon fractions, from heavy to light. The term captures light hydrocarbons that exist in gaseous phase underground but condense into liquid at atmospheric pressure and are recovered by the separator and commingled with the crude stream.
The important element of the definition is that this hydrocarbon mixture remains liquid at atmospheric pressure and normal temperature after passing through surface separating facilities. Please note that some quantities of very light petroleum gases remain dissolved in crude oil. Crude oil can typically be transported to a refinery in a tank truck or tank railcar. (In some cases, a stabilization of light crude can be required before it can be safely transported by rail.)
When reporting the U.S. production of crude oil, the EIA explicitly excludes hydrocarbon liquids that are extracted at natural gas processing plants (the NGLs).
Crude oil also includes lease condensate. The EIA defines "lease condensate" as hydrocarbons recovered as a liquid from natural gas wells in lease or field separation facilities and later mixed into the crude stream. The EIA explicitly counts "lease condensate" received from natural gas wells as crude oil.
By contrast, NGLs are extracted from the residual stream of natural gas that is delivered from the separating facility at an oil lease or a natural gas lease to a gas processing plant via gathering pipelines. Gas processing plants are often complex facilities that require hundreds of millions of dollars to be constructed.
"NGLs" typically refers to ethane, propane, butanes, and "pentanes-plus" (the latter are also referred to as "natural gasoline"). Except for natural gasoline, these hydrocarbons exist in a vapor phase at normal temperature and atmospheric pressure. To illustrate, normal butane (C4H10) has a boiling point of 32°F and iso-butane has a boiling point of 11°F. Ethane and propane have much lower boiling points. Obviously, to be kept in a liquid state for storage, shipping and consumption, ethane, propane and butanes need to be compressed or refrigerated. These NGLs cannot be loaded on a regular tank truck or tank railcar that are used for crude oil transportation.
API gravity is a scale expressing the density of liquid petroleum products. The higher the API gravity, the lighter the compound. Liquids with API gravity above 10 float in water.
Light crudes generally exceed 38 degrees API.
Heavy crudes are commonly labeled as all crudes with an API gravity of 22 degrees or below.
Intermediate crudes fall in the range of 22 degrees to 38 degrees API gravity.
In practice, the gravity ranges used to define heavy/medium/light categories vary slightly throughout the industry.
The following graph shows select crude grades by gravity and sulfur content. On this specific illustrative graph, the light oil produced in some areas of the Eagle Ford is labeled as "condensate" and is shown for illustration as having API gravity in the low-50s. By comparison, Bakken crude is shown as having API gravity in the 45° range.
Gravity, sulfur content and acidity are among the most important characteristics of a specific crude, but are not the only ones.
Is U.S. Growth In Crude Oil Driven By Condensate?
Let's make no mistake, the U.S. crude oil growth comes predominantly from shales, including prolific "combo" plays that co-produce large quantities of liquids-rich natural gas alongside crude oil. Crude oil in such "combo" windows can be of super-light, volatile variety.
However, claims that U.S. crude production growth is "all condensate" are baseless. In fact, the percentage of U.S. crude oil with API gravity exceeding 45° declined slightly in the last 12 months.
The following table shows that the U.S. Lower 48 production of crude oil with API gravity below 35°, which is mostly conventional production, declined by ~7% in October 2017 year-on-year. Please note that the decline is driven mostly by hurricane disruptions in the Gulf of Mexico and Gulf Coast region and is transitory. Heavy oil is the only visibly declining U.S. crude category.
If one were to look at the balance of Lower 48 production, which grew by ~16% during the 12 months, the share of crudes with API gravity above 45° in it declined slightly from 28.7% to 28.2%. The share of the lightest crudes with API gravity of above 55° was virtually unchanged at 6.8%.
The Abundance Of Light Sweet Crude Is A "Luxury Problem" For The Refining Industry
The table above shows that the U.S. production of light sweet crudes is growing at a meaningful pace. At the same time, the supply of medium/sour grades by OPEC has not been growing as fast, in part due to the cartel's policy decisions. It is no surprise that refiners around the word feel the change in the feedstock mix and are forced to adapt.
Generally speaking, it can take a larger amount of light or super-light crude to produce the same amount of gasoline and diesel fuels, as compared to heavy oil processed by highly complex refiners (which also use natural gas to achieve volume gain in processing). However, light and super-light crudes have a major advantage. They can be processed by lower-complexity refineries. They also can be used to "salvage" the more challenging crudes via blending.
The U.S. refining complex is optimized to process more challenging heavy and sour grades (such as Maya or Mars) and generally has limited appetite for incremental light or super-light sweet crudes. Incremental light sweet production has to be exported. However, it would be a mistake to presume that U.S. refiners will never be able to process the fast growing domestic light sweet volumes. Relatively low-cost solutions exist and over time the industry is likely to make such capital investments to take advantage of the discounted domestic feedstocks.
The abundance of light sweet crude in the market is a luxury problem for the global refining industry, even though not all refineries benefit to the same degree.
U.S. Crude Oil Growth Is Real All Right
However, we would not call it rapid. Yet.
U.S. crude production growth in 2017 was actually quite "tame," in the 1 MMb/d range exit-to-exit, based on our estimate. This is less than the pace of U.S. oil growth during the period from 2012-2014. However, this pace of growth is quite impressive, given the price environment that prevailed during 2017.
As we had anticipated (and predicted almost weekly throughout the year), growth accelerated in the second half, as oil prices improved and completion schedules caught up after a slow start in the first half.
While we caution against annualizing the most recent monthly increases, we are convinced that the U.S. shale industry is capable of "rapid proper" growth if consumers around the world continue to provide the price stimulus.
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