Eagle Ford Oil Prices Trade at a Premium to WTI - Condensate Weaker

Oil Drum
Oil Drum

Eagle Ford oil prices realize a nice premium to WTI and higher API condensates trade at a discount. One of the great advantages the Eagle Ford has over other shale plays is location, location, location. A short commute to the nation's petrochemical backbone means operators realize better oil prices than most areas of the U.S.

Eagle Ford Shale Oil Price Premium

Eagle Ford oil prices trade at a premium to WTI or a discount to LLS depending on who you talk to. Over the past two months, posted Eagle Ford prices have traded at a ~$6-8 premium to WTI and a ~$6 discount to LLS posted prices. That's after spending part of April and May at >$10 premium to WTI and almost parity with LLS.

Eagle Ford Condensate Prices Trade at a Discount to Crude Oil

In 2011, over 36% of reported liquids production from the Eagle Ford was considered condensate and as much as 50% of production today is estimated to be condensate. That's a significant portion of production, so it's important to understand its pricing. A recent article by RBN Energy provides more details in regards to condensate pricing.

....there are 3 principal markets for condensate: (a) sale as crude oil, (b) sale as diluent for heavy crude blending, and (c) processing in a splitter and sold as component products. Refiners find condensate less attractive as a crude oil blend because it produces less of the valuable middle distillate blends. The diluent market is attractive but requires shipment to Canada. Some of the Eagle Ford condensate is being shipped south to Corpus Christi by pipeline and then by barge up the Gulf Coast to St James LA and on up the Capline pipeline to Canada. Midstream players in the Eagle Ford are also developing condensate processing facilities. At the moment, however, we can see from Plains All American posted prices that refiners are paying less for Eagle Ford condensate than they do for crude and then applying a gravity adjustment factor to reduce the price they pay for condensate even further.

Using Plains All American posted crude oil and condensate prices, the RBN articles compares 60.1 API Eagle Ford condensate to crude with a 40-44.9 API:

The average posted condensate to crude discount this year was close to $17/Bbl.

You can read the full write up on crude and condensate prices at RBNEnergy.com

The discount for condensate from crude is ~$12/bbl now, but it has stretched over $20 at times in the first two quarters of the year. Putting both the crude and condensate price pieces together we have a better picture of what operators are being paid in South Texas. Crude oil is more marketable and can easily displace imports at refineries. Add optimal location and it receives a premium to WTI. Condensate with an API of 60+ has more limited use and is trading at a discount to crude and WTI. Overall, with an assumed 50/50 split of crude and condensate production in South Texas, operators are still realizing prices better than WTI. Consider the major operators who can negotiate crude prices pegged to LLS and South Texas liquids are fetching an even better premium to WTI.

Share your experience or thoughts in the comment section below.

Important Notes:

Condensate has an API gravity of 50+ and falls between natural gas liquids and crude oil on the hydrocarbon spectrum. Condensate is largely produced at the wellhead, but some volumes are captured in gathering systems. 

WTI prices are currently trading at a discount to comparable international benchmarks (Brent). That is the opposite of the historical norm. Cushing, Oklahoma, is lacking adequate infrastructure need to move oil to the Gulf Coast and other demand centers. When that problem is alleviated, we'll likely see a shift in WTI prices, which will change the discussed relationship of WTI and Eagle Ford crude.

Chesapeake's Eagle Ford VPP Plans Could Mean $1 Billion

Chesapeake Energy announced plans to sell a volumetric production payment (VPP) related to its Eagle Ford Shale assets earlier in the year. The plans were outlined with other assets sales to help fill a funding gap created by decade low natural gas prices. Since the initial announcement, the company has delayed plans to sell the VPP in the Eagle Ford. I've seen two reasons given in the press. The reason I believe to be accurate is that Eagle Ford assets were retained to hold output and cash flow at levels required by debt covenants. With favorable oil prices and production additions in the tens of thousands of barrels per day in 2012, it stands to reason the Eagle Ford is becoming a significant contributor to the company's bottom line.

The other reason mentioned by the press is oil prices have fallen $15 over the past several weeks. While WTI oil prices have fallen below $90 per barrel as of this morning (May 30, 2012), Eagle Ford crude and condensate is trading at a premium to the aforementioned benchmark. Oil, from the Eagle Ford, trades at a premium to WTI and is more comparable to Light Louisiana Sweet (LLS) crude.  LLS prices closed at an almost $11 premium to WTI yesterday. I'm not downplaying the $15 move in WTI, but prices in South Texas are holding at a higher level near $100 per barrel.

My expectation is that Chesapeake will close on an Eagle Ford VPP sometime in 2013.

A VPP will allow Chesapeake to recover some of its capital investment by selling future production at an earlier time. VPP’s usually have a prescribed time period and a prescribed volume. Chesapeake will deliver the product for the buyer until the conditions of the agreement are met. When the obligations are met, existing production will revert back to Chesapeake.

Enterprise Products Expands ECHO Crude Storage - Eagle Ford Receipt Point

Enterprise Product Partners announced the acquisition of a 37-acre tract next door to the company's Enterprise Crude Houston (ECHO) oil terminal and plans to expand storage capacity to 6 million barrels. The expansion will be completed just in time to begin  receiving crude from Enterprise's 350,000 b/d Eagle Ford pipeline set for full completion in Q1 2013. The first phase of Enterprise's Eagle Ford pipeline is set to be completed in the second quarter of 2012 and the line will be fully operational by the first quarter of 2013. The expanded receipt point will also be able to receive crude from the Seaway system that is being reversed to bring crude from Cushing to the Gulf Coast and the Cameron Highway System that delivers oil from the Gulf of Mexico.

New CME Crude Contract Delivery Point

There is also potential for the storage and receipt point to become the delivery point of a new Chicago Mercantile Exchange (CME) crude oil contract. The traditional contract priced in Cushing Oklahoma, West Texas Intermediate (WTI), has come under scrutiny as differentials expanded to $10-15 less than comparable Brent crude oil prices. The new CME contract will provide an alternate trading point that is better aligned with Gulf Coast prices.

For reference, the 6 million barrels of storage at ECHO will be a little less than 10% of total storage capacity estimated in Cushing, OK.

Read the full press release at enterpriseproducts.com

Eagle Ford Crude is Pushing Out African Imports

Eagle Ford crude production is pushing out African imports. The Gulf Coast region alone is importing 400,000 barrels per day less than it did at this time in 2010. Domestic oil production is on the rise and foreign crude will continue to be displaced by locally sourced Bakken, Eagle Ford, and Permian crudes. Don't expect that trend to slow as the Bakken and Eagle Ford are on pace to produce 1 mmboe/d each in less than five years.

Don't underestimate the advantages of domestic crude. There are a lot more jobs on the upstream side of the business. It takes multiples more to drill and produce than it does to refine oil. The oil patch is a bright spot in what has been a rather dim jobs market over the past couple of years. As long as oil prices support development, this trend isn't going to change any time soon.

"Crude from Eagle Ford in Texas is coming through, and a rail terminal has opened, taking about 70,000 barrels of crude from North Dakota down to Louisiana," Jordan said.

Eagle Ford Formation

Marathon Petroleum Corp. is moving oil from the Eagle Ford shale-rock formation to its refinery at Texas City, according to the company. Daily production of crude and condensates at Eagle Ford has almost doubled this year from 2010, according to data from the Railroad Commission of Texas.

Refining margins in the U.S. Gulf have sunk to a loss of $0.42 a barrel Nov. 11 from a profit of $16.67 on May 10, the highest in more than 2 1/2 years, Bloomberg data show. The margin is calculated based on the return for turning three barrels of Light Louisiana Sweet crude into two barrels of gasoline and one of diesel. It has averaged $5.73 a barrel this year.

The U.S. imported an average 4.4 million barrels of crude a day to the Gulf Coast in the week ended Nov. 4, compared with 4.8 million in the same week last year, according to the Energy Department. Imports averaged 5 million barrels a day this year. Inventories in the U.S. Midwest are at the highest level for the time of the year in at least a decade, at 92.2 million barrels.


Not Enough Pipelines, Railcars, or Trucks for U.S. Crude

West Texas Intermediate (WTI) crude is trading at a more than $25 discount to Brent Crude. Brent prices are used as the benchmark for two-thirds of the international crude trade. WTI is used as the U.S. benchmark. More than $25 per barrel is an amazing spread when you consider WTI is priced in Cushing Oklahoma and the U.S. accounts for almost 25% of worldwide oil demand. How can oil be cheapest where demand is the highest? When you have a moment, look at Bakken and Eagle Ford drilling levels.

Shale Plays Adding Production Outside of the Gulf Coast

Shale plays like the Bakken and growing plays in West Texas along with an influx of Canadian oilsands production in the midwest have pushed a surplus of oil all the way to Oklahoma. In a perfect market, we could move oil quickly and easily to take advantage of the arbitrage or "free money". Oil needs to penetrate the Gulf Coast refining market to recognize higher prices. Sounds simple.

Pipelines, Railroads, and Trucks are Stressed

We need more pipelines delivering crude in the Gulf Coast. We don't have capacity, so oil marketers resort to railroad agreements. When rail terminals and railcars run at capacity, trucking becomes the last option. For you guys with a truck and trailer, there's a margin waiting to be made between Cushing, OK, and the Gulf Coast.

The idea of trucking crude sounds great, but no one is doing it because they are already working in the shale plays. Trucks are making as much as $5 a barrel to move crude from tanks to pipelines or storage facilities and those are short hauls. If you can make $5 a barrel three to four times in a day ($3,000-4,000 per day) , there is no incentive to make long hauls that would only pay $7.50-10.00 per barrel ($1,500-2,000 per day). The math is simple, so don't expect truckers to fill the gap as long as there is high demand for short haul trips.

The shortage of pipelines, rail facilities, and now trucks has led to the historic spread between foreign brent crude and WTI (the futures spread was $27 on October 14). As the Bakken and other oil plays continue to grow, the problem will only be answered by major pipeline expansions. Some of those are already in the works, but more are likely on the way.

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