End of easy money for mini-refiners splitting U.S. shale?

Mon Dec 28, 2015 4:34am EST
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By Kristen Hays

HOUSTON (Reuters) - Energy companies and oil trading firms that teamed up to build several mini-refineries that convert a swelling surplus of ultra-light U.S. crude into fuels for export seemed like a pretty safe investment bet for a while.

The bet was built on several converging dynamics: an ever-rising supply of condensate; a U.S. refining system built to run heavier crudes; and a longstanding ban on crude exports that appeared unlikely to unwind amid partisan paralysis in Washington, D.C.

Now, as U.S. oil output reverses its five-year rise and after lawmakers ended the 40-year-old export ban this month, oil executives and analysts question the wisdom of nearly $1 billion worth of so-called condensate splitters built over the past year, and the future of another $1.2 billion planned.

Traders are wondering what will happen with existing splitters run by companies such as Kinder Morgan Inc. They also question how the new landscape will affect traders such as BP Plc and Trafigura, which signed long-term contracts to buy all the output from those facilities.

Other pending projects without guaranteed buyers could be abandoned, experts say.

The once-restricted domestic crude not only faces increased competition. It also is hurt by the inversion of the global oil market, where once-abundant U.S. production is declining while global supplies are rising. This has eliminated the price discount that underpinned their model.

"It's a much different competitive environment now that we don't have distressed condensate," said Sandy Fielden, an analyst with RBN Energy.

While the same can be said of the nation's larger, older fleet of full-scale refineries, splitters may be most exposed to the sudden changes, given their dependence on the most deeply discounted variety of oil.   Continued...

Unused oil tank cars are pictured on Western New York & Pennsylvania Railroad tracks outside Hinsdale, New York August 24, 2015.  REUTERS/Lindsay DeDario