condensate is gravy on the steak.A flame rises from a tower at Yemen's second liquid natural gas plant in the coastal area of Balhaf, southeast of the capital Saana.
Photograph by: Herald Archive, AFP-Getty Images
LONDON - OPEC may have to impose limits on its production of condensate and natural gas liquids (NGLs) if it is to retain much influence over oil prices in future.
Output of these valuable liquids — light hydrocarbons used to make chemicals and other oil products such as gasoline — has risen rapidly over the past decade and they are competing directly with crude oil in many downstream markets.
The Organization of Petroleum Exporting Countries is producing more than five million barrels of oil equivalent per day (boepd) of gas liquids, almost 70 per cent more than in 2000, and output is set to rise by more than one million boepd by the end of 2010, the International Energy Agency says.
Yet the producer group, which puts great effort into trying to control the crude oil production of its 12 member countries, imposes no limits on condensate or other gas liquids.
Oil analysts say OPEC should look carefully at gas liquids output and may need to consider imposing limits on production along the lines of the target system it uses for crude oil.
“Increased condensate production will impact the oil price in ways that OPEC can’t foresee,” said Al Troner, president of Asia Pacific Energy Consulting in Houston.
“Not having quotas for condensate gives OPEC members an opportunity to strip it out. . . . They are encouraging them to cheat,” said Troner, describing condensate and gas liquids as “the gravy on the steak” for oil and gas producers.
OPEC has never imposed limits on the amount of condensate and NGLs it produces, partly because there are no simple, widely agreed definitions for them.
Most in the industry define condensate as a mixture of hydrocarbons that exist as gas in underground reservoirs but which condense at atmospheric pressure and can be refined into the same high-value oil products as crude. NGLs have similar properties but usually come from processing natural gas.
OPEC has also avoided curbs on gas liquids because it has wanted to encourage the output of both natural gas, as well as butane and propane, known together as liquefied petroleum gas.
The increase in gas liquids output comes at a time when OPEC’s crude production has been held down in an attempt to support oil prices in the wake of the global economic downturn.
Curbing crude production has been tough on OPEC’s poorer members, such as Angola, Venezuela and Ecuador, which are also among the smallest producers of gas liquids.
“Essentially, you have oil producers like Angola and Venezuela coming under pressure to reduce production while Qatar can happily ramp up its output of condensates and NGLs,” said Simon Wardell, senior oil analyst at IHS Global Insight.
“So, in fact, the oil producers are going to be subsidizing Qatar’s growth in NGLs,” he said. “It looks a little unfair.”
Disagreements over the definition of condensate has given some oil producers room for what analysts call “creative accounting” in how they report their oil output.
Industry officials said they suspect some OPEC countries classify light crudes as condensate when they report production to OPEC, helping them stay within their crude output targets.
“It has become confused as to when it is a condensate or not a condensate, especially when OPEC countries want to produce outside quotas,” said Prof. Paul Stevens at the Chatham House international affairs think-tank in London.
OPEC would face hurdles introducing output targets for condensate and gas liquids, and they would be hard to enforce.
“Everything is complicated until you try. I agree it is difficult. But if they want these quotas to stick, condensate quotas is something that should be considered,” Troner said.
Wardell agreed:
“OPEC is going to have to grasp this nettle,” he said. “It is quite a challenge, but I think eventually OPEC will have to talk about including condensates within its (oil output) target system or have separate targets.”
OPEC secretary general Abdullah al-Badri was not immediately available for comment.
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