Defining Condensate vs. Light Crude: Fears and Solutions

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Researched by Industrial Info Resources (Sugar Land, Texas)--As more U.S. light crude is being pulled from the Bakken and especially the Eagle Ford shale plays, the curious case of condensate, an intermediate form of hydrocarbon between traditionally defined crude oil and natural gas, is under close scrutiny. The definition is important because of a ban on the exporting of crude oil from the U.S. that was put in place during the oil shock of the 1970s. This ban does not include the exporting of natural gas liquids, another name for intermediate hydrocarbons between crude oil and natural gas.

However, where "crude oil" ends and "condensate" begins is grounds for contention, as crude oil is a mixture of various hydrocarbon chains and has an inherently hazy definition. Defining the difference is a topic of debate, and among the many standards suggested are the American Petroleum Institute (API) gravity of the liquid; using the "processed definition"; and the "molecular argument."

The usual metric by which hydrocarbons are classified is their API gravity, a measurement of their density relative to water, which has a gravity of 10. Liquids with gravities higher than 10 will float on water, and those with lower gravities will sink. The dividing line between crude oil and condensate is generally accepted as an API gravity of about 45, with anything higher considered condensate.

However, that general acceptance is not a legal definition, as some pipelines classify "light crude oil" as hydrocarbon streams up to 53 API. Also, API gravity can be altered, as is the case when shipping Alberta oil sands bitumen via pipeline. The viscous bitumen is diluted with condensate before shipping to raise its API and make it thin enough to be effectively pumped through a pipeline.

This dilution holds could work in the opposite direction if a definition of condensate is established based solely on API gravity. Thinning "crude oil" to the point of API gravity high enough to label it condensate would be one way to skirt the ban and export crude oil without having to change legislation.

Given the headache that pipeline owners and operators face with regular permitting--exemplified by the now-infamous, years-delayed Keystone XL pipeline project, owned by TransCanada Corporation (NYSE:TRP) (Calgary, Alberta)--changing federal legislation would be far more difficult. Though unlikely that any producer or shipper would test the legality of such an action, it is one that regulating authorities likely are considering in this debate.

The current legislation allows condensate/light crude oil to be exported on the condition that it has been processed to a certain degree, thus removing its "crude" oil status. The two companies that have been permitted to export condensate under this ruling, Enterprise Products Partners LP (NYSE:EPD) (Houston) and Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas), have had their processes and streams checked individually before being permitted. With the staggering number of producers and shippers who would also seek permission to export, examining each stream individually would create regulatory gridlock.

The molecular argument is a simple theory, but a difficult practice that would define the line between condensate and crude using the number of carbon atoms in the hydrocarbon chain. Each hydrocarbon chain has a name and a certain number of carbon atoms, the simplest of which is methane with four hydrogen atoms and one carbon atom. As carbon atoms are added to the chain, the hydrocarbon is no longer considered natural gas, but a natural gas liquid.

Setting a cutoff number of carbon atoms to demarcate "natural gas liquids," "condensate," and "light crude" on the molecular level, provides an objective reference point for each classification. Since the makeup of liquids streams are not standard and can contain a variety of hydrocarbons from multiple classifications, they can be regulated, based on the proportion of each classification in the stream. This method would prevent API gravity manipulation by focusing on the actual content of the stream, rather than its viscosity; however, it would be cost-intensive for producers or shippers to monitor the chemical makeup of each of their streams.

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