Despite OPEC working to support recovering crude prices by curbing production from the world's biggest oil exporters, some of its members have increased output of a type of crude produced from natural gas. The extra-light crude, known as condensate, commands a premium over the internationally traded benchmark crudes but it is excluded from the formal quotas OPEC has imposed on its members. But as condensate finds its way to oil refineries around the world, it contributes to global oil supply and affects market balance, and its production from regions east of Suez is set to surge.
"The acceleration of exploration for and development of gas reserves, both in Asia-Pacific and the Middle East Gulf, will inevitably boost condensate output through 2015," AJ Troner, the managing director of Asia Pacific Energy Consulting, based in Houston, predicts in a research report. "Over the course of this decade, condensate has moved from a specialty niche into the mainstream of Asia-Pacific and Middle East Gulf trade. Increasingly it has impacted not only petrochemical feedstock balances, but also gasoline supply and marketing."
Because condensate is a by-product of gas production, however, OPEC has had to ignore it when it sets crude production targets, allowing its members to pursue gas development independently from oil. That economic freedom is essential to support industrial diversification so oil producers will not willingly relinquish it. Still, it gives OPEC members with big gas reserves a significant loophole for boosting crude exports when the group as a whole is trying to cut supplies.
According to OPEC, members have already pumped up their output of natural gas liquids (NGL) and non-conventional oils by nearly 9 per cent this year from last year's average, while their production of crude subject to quotas has fallen by 9 per cent. Thanks largely to increased NGL production, a category that includes condensate, the share of OPEC members' total hydrocarbon liquids output that is subject to quotas has slipped by 2 percentage points since last year to 86 per cent.
Condensate consists of hydrocarbon vapour produced with gas that becomes liquid shortly after leaving the wellhead. If left in the gas stream it would condense inside pipelines causing problems with gas flow, so it is removed and marketed separately. Just as gas was once regarded as a waste product from oil production with little intrinsic value, gas condensate used to be thought of mainly as a nuisance. It complicated the production of sales gas. Worse, it tended to clog up gas reservoirs by condensing underground and blocking the flow of gas into producing wells, sometimes "killing" fields that were drained too fast.
But recently, condensate has come into its own on international markets as traders have begun to appreciate the value of a commodity that can use all the existing infrastructure for transporting and processing conventional crude and oil products, and is also an important source of petrochemical feedstock in the form of naphtha. Another characteristic working in condensate's favour is its low sulphur content, making it equivalent to the light sweet crudes that non-specialised oil refiners prefer.
As a result, condensate has become much sought after, to such an extent that exploration companies sometimes consider it a greater prize than gas. Nowhere is this clearer than in Saudi Arabia, where the prospect of striking "wet gas" containing condensate has been the driving force for gas exploration efforts in the kingdom's Rub al Khali desert, or Empty Quarter. In 2003, short of gas for power generation, Saudi Arabia took the unusual step of inviting foreign oil companies to bid on five-year exploration contracts, hoping to gain 2 million cubic feet (cu ft) per day of new gas supplies from the Rub al Khali by 2011.
But under the contracts' tough terms, any oil discovered would be handed over to Saudi Aramco, the national petroleum company, for development, while Riyadh would pay only the kingdom's subsidised domestic price of US$0.75 per 1,000 cu ft, minus transport costs for gas. That effectively left Aramco's various foreign partners, including the Anglo-Dutch Royal Dutch Shell, France's Total, Italy's Eni, Spain's Repsol, Russia's Lukoil and China's Sinopec, searching for condensate, which they would be allowed to produce and market at international prices.
After the drilling push yielded a string of disappointments, Luskar, a joint venture led by Lukoil, made a light oil discovery in February followed by a gas strike a month later. Lukoil is reportedly in "discussions" with Aramco about whether the liquids discovery constitutes oil with associated gas, or gas with an unusually high condensate component. The venture is focusing on gas and condensate production by 2012 from its second discovery.
In April, a consortium led by Shell also struck gas but it was dry gas. The lack of condensates means further appraisal will be needed before launching a commercial venture is even considered. In neighbouring Abu Dhabi, condensate also figures prominently in a technically challenging US$10 billion (Dh36.72bn) plan to develop the emirate's Shah sour gas field. Abu Dhabi National Oil Company (ADNOC) and the US oil company ConocoPhillips continue to negotiate final terms of their proposed joint venture, after announcing a preliminary agreement last month.
According to industry sources, ConocoPhillips was awarded the concession for the Shah field, its first in Abu Dhabi, because it offered to hand over gas stripped of liquids to ADNOC free. It would recover its costs from sales of condensate and other NGLs. Those are tough terms for the US partner but concluding the deal would give ConocoPhillips a long-sought entry into Abu Dhabi, an important Gulf oil exporter, just a few years before a number of major oil concessions in the emirate are due to expire.
A major uncertainty is whether ADNOC will renew the concessions with its existing foreign partners, or seek newcomers in the hope of gaining access to a wider range of advanced oil and gas technology. As of late last month, ConocoPhillips and ADNOC seemed on course to seal their deal, with ADNOC announcing at a major gas conference in Abu Dhabi that it would soon award construction contracts for Shah.
But if the project does proceed, it will be due at least partly to a favourable outlook for global condensate demand and pricing. Other companies have also invested heavily on profits from sales of NGLs and condensate as they strive for access to Middle East oil and gas reserves. Crescent Oil and Dana Gas, both based in Sharjah, are supplying free gas to new power plants in Iraqi Kurdistan as they develop the region's Khor Mor gasfield. Initial revenues from the project will come from sales of the associated liquids.
Abu Dhabi's Dolphin Energy is another company that extracts and markets condensate, in this case from gas produced in Qatar. The consortium of Mubadala Development, the investment arm of the Abu Dhabi Government, Total and Occidental Petroleum is best known for importing Qatari gas by pipeline to the UAE and Oman. But it has also been shipping condensate since 2007. Dolphin's condensate production stands at 97,000 barrels per day.
Mr Troner notes that as high construction costs and falling oil demand recently pushed refining projects off the table, gas projects "tended to be delayed rather than shelved". "This implies a continuing expansion of gas production in the medium term and a parallel rise in condensate output," he concludes. As for demand, in Mr Troner's opinion this will come from the Asia-Pacific region, where fast-track expansion of petrochemicals capacity is being based on naphtha or direct-use condensate feedstock.
"This will certainly assure substantial new demand for incremental condensate output," he predicts. Some Gulf states are also investing in naphtha-based petrochemicals expansion. One is Abu Dhabi, where three entities owned by the Government - International Petroleum Investment Company, ADNOC and the Abu Dhabi Investment Council - have formed a joint venture called Chemaweyaat to develop a $20bn naphtha-based chemicals complex that will be among the world's biggest.
The first phase of the project is due to come on stream in 2014, just in time to benefit from substantial new condensate supplies from the Shah field and other big gas developments that ADNOC and its partners are pursuing. @Email:firstname.lastname@example.org