Dear OGIB Reader,

Condensate prices in Canada are soaring—now sitting some $14/barrel ABOVE WTI—making it the most valuable Canadian energy product.

It’s creating huge profits for the lucky few natural gas producers who have large condensate volumes in their production stream.

Condensate is both a heavy Natural Gas Liquid (NGL), and a super light oil, making it very versatile. In Canada it’s used to dilute heavy oil from the oilsands, and fast increasing production there is driving condensate demand—and prices.

Canadian production of condensate is flat, which is bullish in the face of oilsands growth. But there is a cloud on the horizon—fast-rising US condensate production, particularly out of the Eagle Ford in southeast Texas.

I’m in Texas this coming week—the Eagle Ford in particular—on a property visit, and to learn more about the how and when the glut of American condensate could flow up to Canada.

In my next story, I’ll outline the very bullish case for Canadian condensate prices and producers—both from the supply and demand side. I’ve been talking to oil and gas marketers in Alberta to get an “on-the-street” view of what’s happening, and what the industry insiders think could happen.

And it’s all good news for condensate producers. That’s why I’ve made one junior condensate player one of my largest positions.

Part III of my series will focus on US efforts to get more condensate to Canada to take advantage of that great pricing. A lot of that article will include what I learn this week in Texas.

Today, to set up this profit picture, I explain the basics of condensate—a very complex molecule—in a simple way:

The What and How Much of Condensate

Condensate is oil, but a very light kind of oil. Here, 'light' describes the weight of an average molecule –condensate is made up of short hydrocarbon molecules that weight much less than the long hydrocarbon molecules in regular crude oil.

The API gravity system describes hydrocarbon weights. It’s a system that uses an inverse scale: the higher the number, the smaller the molecules. Technically, condensates have an API gravity of 50° or higher. For contrast, WTI crude has an API gravity of about 39°, Brent sits around 35°, and crudes considered 'heavy' are those that come in below 22°.

Condensate earned its name because it is a vapour in its underground reservoir that condenses as its rises the surface, where the temperature is lower. And to be precise, condensate refers to a mixture of hydrocarbons, running the gamut from highly volatile natural gas liquids to naphtha range materials resembling gasoline.

(The other NGLs commonly produced with condensate and regular dry gas (methane) include ethane, propane and butane, and are much LESS valuable than condensate.)

So just how much condensate is North America producing?

Oil and gas wells in North America have always produced some condensate, but of late condensate production has simply ballooned. That’s because it’s produced alongside shale oil AND shale gas—and we all know how much that has increased in the last five years.

From the Eagle Ford shale in Texas to the Bakken shale in North Dakota and up to the Montney shale in northern BC, oil and gas shales are producing major volumes of condensate.

It is difficult to know exactly how much because few producers report condensate production volumes. Instead condensate gets lumped in with crude oil or added to natural gas production numbers by reporting both in terms of barrels of oil equivalent (which is misleading in all kinds of ways).

However, while I can't pinpoint precise condensate production numbers, I can get a good idea of condensate volumes by examining individual plays or provinces.

BC is a good place to start. The Montney shale basin in the province's north is earning a reputation of producing lots of condensate and natural gas liquids alongside its natural gas, bonus co-products for companies in Canada where condensate demand is high.

The drilling rush in the Montney started in about 2009, when natural gas prices fell and producers realized that co-produced natural gas liquids (NGLs) and condensate in the Montney turned uneconomic gas wells into profitable ones. As a result, between 2007 and 2011 annual condensate production in BC increased 28%. BC now produces more condensate than crude oil.

But condensate production growth in BC is a mere shadow of what is happening south of the border.

The best example comes from the Eagle Ford shale basin, which stretches across much of south and east Texas. The shale's tight sedimentary rocks contain a range of hydrocarbons:

1.    wells on the southeastern flank generally produce dry gas,

2.    wells in the middle produce gas, NGLs, and condensate, and

3.    wells to the northwest generate oil and condensate.
 

Eagle Ford producers drilled their wells looking for oil or gas. Condensate was an unexpected bonus – but it now makes up a huge amount of the hydrocarbons produced from the formation.

Forecasts predict that total Eagle Ford oil output will reach 500,000 to 800,000 barrels per day by 2020. Up to 40% of those barrels will be condensate.

Compare that to 2011, when condensate production from the formation averaged 130,000 barrels per day. It means condensate production from Eagle Ford will likely grow by 150% in less than a decade. And Eagle Ford is just one of a slew of shale basins being drilled and fracked in the United States to produce oil, natural gas, NGLs, and condensate.

It sounds great, right? Not only are shale basins producing the natural gas and crude oil expected, they are also churning out piles of condensate, a hydrocarbon mixture so light you could often pour it straight into your tractor. Condensate must be making US shale producers happy, right?

Wrong.

Stayed tuned – I’ll continue this tale next week. Again, while I’m in down in Texas I’ll be talking to shale producers and quizzing condensate marketers, and find out what is being done to monetize this unexpected bounty of light oil – and what the impact will be for Canadian shale producers, who are now making a killing on condensate.

In fact my research has uncovered where North America's richest, most valuable condensate is. And I know the junior producer with the most leverage in the play... a potentially huge win in the making. Continue reading here.

- Keith