A BOOM in investment in low-end refineries along the US Gulf of Mexico is helping to ease strains in the country’s oil industry, giving the White House breathing space as it looks to relax a longstanding ban on exporting crude oil.

The refineries, known as condensate splitters, turn a very light oil called condensate into products such as naphtha, used as a feedstock for further production.

Under US law, condensates pumped from oil wells are defined as crude oil and cannot be exported without being processed.

Condensate output is expanding so fast at Eagle Ford Shale in south Texas that many executives warn the export ban will create a glut, forcing down prices and holding back the industry’s growth.

Oil producers have been lobbying Washington to lift the crude oil export ban. The Obama administration has launched a review and is looking at whether US refineries can absorb rising supplies

The splitters will help ease that problem because they convert condensate into exportable products, according to Jake Dweck, a partner at law firm Sutherland, Asbill & Brennan.

Peter Tertzakian of ARC Financial in Calgary says the investment in splitters is evidence that “the market is finding ways round” export restrictions. “They boil the oil a bit, then they export the products.”

Splitters are a cheaper option for processing oil compared with building refineries which cost hundreds of millions, rather than billions of dollars, says Houston oil consultant Andy Lipow.

Splitting is a simple procedure and the products usually require further processing. About 445,000 barrels per day of processing capacity is planned or under construction in the Gulf of Mexico; a rise of about 5pc in capacity.

Oil producers have been lobbying Washington to lift the crude oil export ban. The Obama administration has launched a review and is looking at whether US refineries can absorb rising supplies. Most Americans would oppose crude oil exports if it meant petrol prices rose, according to a Reuters/Ipsos poll.

However, analysts believe the White House could start to allow increased exports of condensate. Many refineries on the Gulf coast have a limited ability to process condensate, meaning that it trades at a discount of $20 per barrel to benchmark Louisiana light crude, according to consultant RBN Energy.

Greg Priddy, an oil analyst at Eurasia Group, a researcher, said the new splitters would keep the condensate surplus under control in the short term. “For the next couple of years it helps take the pressure off for any comprehensive action,” he said.

As of late May, eight companies had announced plans to build condensate splitters, in addition to one running already at Port Arthur, Texas, said RBN Energy. The total investment is more than $1bn.

Valero Energy, one of the largest US refiners, is also building 160,000 b/d of similar facilities called topping units at its Texas refineries, according to Afolabi Ogunnaike of Wood Mackenzie.

However, the new units are likely to be profitable only if the export restrictions remain in place.

If condensate exports were allowed, said Sandy Fielden, RBN’s director of market analytics, “almost overnight these splitters [would] become questionable or redundant”.

Martin Midstream Partners, an oil logistics group, recently halved the size of a planned splitter in Corpus Christi, Texas, to 50,000 b/d.

Its contracted shipper, an integrated oil company, is “very keen” on the question of the export ban, said Joe McCreery, vice-president of finance. “To the extent that our project has slowed, I think it’s their assessment of whether that ban is lifted or not.”

Domestic condensate production has roughly doubled in the past three years to 1.2m b/d. It will reach 1.6m b/d by the end of 2018, RBN estimates.

Condensate has “limited markets if it’s not allowed to be exported, which has led to the interest in splitters”, Michael Mears, Magellan Midstream Partners chief executive, said last month.

If the White House liberalised condensate exports, some of the commodity would bypass US splitters for higher-paying refineries and petrochemical plants in Asia, Mr Fielden said.

Published in Dawn, Economic & Business, June 16th, 2014