Sunday, January 17, 2016

The great condensate con: Is the oil glut just about oil?

My favorite Texas oilman Jeffrey Brown is at it again. In a recent email he's pointing out to everyone who will listen that the supposed oversupply of crude oil isn't quite what it seems. Yes, there is a large overhang of excess oil in the market. But how much of that oversupply is honest-to-god oil and how much is so-called lease condensate which gets carelessly lumped in with crude oil? And, why is this important to understanding the true state of world oil supplies?

In order to answer these questions we need to get some preliminaries out of the way.

Lease condensate consists of very light hydrocarbons which condense from gaseous into liquid form when they leave the high pressure of oil reservoirs and exit through the top of an oil well. This condensate is less dense than oil and can interfere with optimal refining if too much is mixed with actual crude oil. The oil industry's own engineers classify oil as hydrocarbons having an API gravity of less than 45--the higher the number, the lower the density and the "lighter" the substance. Lease condensate is defined as hydrocarbons having an API gravity between 45 and 70. (For a good discussion about condensates and their place in the marketplace, read "Neither Fish nor Fowl – Condensates Muscle in on NGL and Crude Markets.")

Refiners are already complaining that so-called "blended crudes" contain too much lease condensate, and they are seeking out better crudes straight from the wellhead. Brown has dubbed all of this the great condensate con.

Brown points out that U.S. net crude oil imports for December 2015 grew from the previous December, according to the U.S. Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy. U.S. statistics for crude oil imports include condensate, but don't break out condensate separately. Brown believes that with America already awash in condensate, almost all of those imports must have been crude oil proper.

Brown asks, "Why would refiners continue to import large--and increasing--volumes of actual crude oil, if they didn’t have to--even as we saw a huge build in [U.S.] C+C [crude oil plus condensate] inventories?"

Part of the answer is that U.S. production of crude oil has been declining since mid-2015. But another part of the answer is that what the EIA calls crude oil is actually crude plus lease condensate. With huge new amounts of lease condensate coming from America's condensate-rich tight oil fields--the ones tapped by hydraulic fracturing or fracking--the United States isn't producing quite as much actual crude oil as the raw numbers would lead us to believe. This EIA chart breaking down the API gravity of U.S. crude production supports this view.

Exactly how much of America's and the world's presumed crude oil production is actually condensate remains a mystery. The data just aren't sufficient to separate condensate production from crude oil in most instances.

Brown explains: "My premise is that U.S. (and probably global) refiners hit in late 2014 the upper limit of the volume of condensate that they could process" and still maintain the product mix they want to produce. That would imply that condensate inventories have been building faster than crude inventories and that the condensate is looking for an outlet.

That outlet has been in blended crudes, that is heavier crude oil that is blended with condensates to make it lighter and therefore something that fits the definition of light crude. Light crude is generally easier to refine and thus more valuable.

Trouble is, the blends lack the characteristics of nonblended crudes of comparable density (that is, the same API gravity), and refiners are discovering to their chagrin that the mix of products they can get out of blended crudes isn't what they expect.

So, now we can try to answer our questions. Brown believes that worldwide production of condensate "accounts for virtually all of the post-2005 increase in C+C [crude plus condensate] production." What this implies is that almost all of the 4 million-barrel-per-day increase in world "oil" production from 2005 through 2014 may actually be lease condensate. And that would mean crude oil production proper has been nearly flat during this period--a conjecture supported by record and near record average daily prices for crude oil from 2011 through 2014. Only when demand softened in late 2014 did prices begin to drop.

Here it is worth mentioning that when oil companies talk about the price of oil, they are referring to the price quoted on popular futures exchanges--prices which reflect only the price of crude oil itself. The exchanges do not allow other products such as condensates to be mixed with the oil that is delivered to holders of exchange contracts. But when oil companies (and governments) talk about oil supply, they include all sorts of things that cannot be sold as oil on the world market including biofuels, refinery gains and natural gas plant liquids as well as lease condensate. Which leads to a simple rule coined by Brown: If what you're selling cannot be sold on the world market as crude oil, then it's not crude oil.

The glut that developed in 2015 may ultimately be tied to some increases in actual, honest-to-god crude oil production. The accepted story from 2005 through 2014 has been that crude oil production has been growing, albeit at a significantly slower rate than the previous nine-year period--15.7 percent from 1996 through 2005 versus 5.4 percent from 2005 through 2014 according to the EIA. If Brown is right, we have all been victims of the great condensate con which has lulled the world into a sense of complacency with regard to actual oil supplies--supplies he believes have been barely growing or stagnant since 2005.

"Oil traders are acting on fundamentally flawed data," Brown told me by phone. Often a contrarian, Brown added: "The time to invest is when there's blood in the streets. And, there's blood in the streets."

He explained: "Who of us in January of 2014 believed that prices would be below $30 in January of 2016? If the conventional wisdom was wrong in 2014, maybe it's similarly wrong in 2016" that prices will remain low for a long time.

Brown points out that it took trillions of dollars of investment from 2005 through today just to maintain what he believes is almost flat production in oil. With oil companies slashing exploration budgets in the face of low oil prices and production declining at an estimated 4.5 and 6.7 percent per year for existing wells worldwide, a recovery in oil demand might push oil prices much higher very quickly.

That possibility is being obscured by the supposed rise in crude oil production in recent years that may just turn out to be an artifact of the great condensate con.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


Joe said...

My guess is that the surplus of condensate and blended "dumbell crudes" has been stacking up in storage tanks, especially in the US, cutting the amount of working storage available to purchasers. Lack of storage increases the sensitivity of the market price to supply/demand imbalance magnitude. If a purchaser of oil has plenty of cheap storage, they might purchase oil they can't use today at a slight discount and save it for future use. If they have no storage they won't buy it at all, no matter how low the price.

energyskeptic said...

Kurt, are you saying that the apparent oil glut is mostly NGL's and not oil? Also, are NGL's what make it appear that oil storage is full? I never could understand why NGL's are included in oil production in the EIA stats, since only 13% of NGL's can be blended with gasoline (the pentane). The rest is ethane, butane, propane, and isobutane -- mainly useful for petrochemicals, plastics, and heating (propane).

By the way, I've just written a book for Charlie Hall's Springer Energy Briefs series called "When Trucks stop running: Energy and the Future of Transportation" where I look at all the possible ways trucks, rail, and ships could keep moving as oil declines, including NGL's, CNG, LNG, coal-to-liquids, biofuels, hydrogen, electrification, etc. More info at

I think all the endless electric car nonsense is effective at distracting people from the heavy-duty transportation that really matters. Virtually everything in our homes, everything in our stores, got there on a truck. Prior to that, 90 percent of those items were transported on a ship and/or a train, which all run on finite oil. If trucks, trains, and ships stopped running, our global economy and way of life would stop too.

Kurt Cobb said...


First, I find myself hitting your site regularly since so many people refer to your work. So, thanks for the great work you are doing.

As for condensates and NGLs, terminology in this case is the enemy of clarity. For a good treatment of this problem How the changing definition of oil has deceived both policymakers and the public. NGLs generally refer to both natural gas plant liquids and lease condensate which originate from two different sources, i.e. gas wells vs. oil wells. And, yes, part of the storage issue is the storage of lease condensate since it is often, as indicated, mixed with crude oil. Natural gas plant liquids come from natural gas processing plants and so are not typically stored in combination with crude oil (though in gasoline refining, butane is usually mixed in with gasoline).

Yes, propane and butane, are used for transportation fuels. But their supply is limited by the amount of natural gas demand. No one withdraws natural gas from wells solely for the propane or butane it contains. There are practical limits to how many propane-powered vehicles we can have.

Now, if we didn't make certain chemicals from natural gas plant liquids, we would be making them from oil, and so in an indirect way this keeps more oil in the liquid fuels market rather than the petrochemical market. But I think the substitution effect here is exaggerated by those saying we should consider all liquids as part of the oil supply. As I said in the piece, the marketplace certainly makes distinctions between these products.

I think you are right about truck freight being crucial to our current way of living. I remember an exchange with an Italian reader who explained that while European passenger rail is far superior to that of the United States, one reason for this is often not understood. Much of the freight in the United States moves by rail at some point and so our tracks are filled with freight trains that delay passenger travel. In Europe 80 percent of the freight moves by truck. The rails are not so burdened with freight and so passenger trains move with fewer delays and at higher speeds.

But in both places truck freight remains crucial. Best of luck with your new book.

westexas said...

Condensate is basically natural gasoline, and it is a byproduct of natural gas production. However, the issue of relative quality, between crude and condensate, is a little bit of a red herring.

The CC's (Cornucopian Crowd) argue that there is no sign of any kind of peak in sight. I would argue that this assertion is manifestly false when it comes to actual crude oil production (45 API and lower crude oil). In my opinion, the available data strongly suggest that we have been on an "Undulating Plateau" in actual global crude oil production since 2005, while global natural gas production and associated liquids, condensate & natural gas liquids, have so far continued to increase.

Again, what the EIA calls "Crude oil" is actually Crude + Condensate (C+C), and based on EIA data 22% of Lower 48 C+C production in 2015 exceeded 45 API gravity and about 40% of US Lower 48 C+C production exceeded the maximum API limit for WTI crude (42 API Gravity).