Rick R. Haun, Ken W. Otto
Purvin & Gertz Inc.
Dallas
S. Craig Whitley
Purvin & Gertz Inc.
Houston
International LPG markets will be relatively tight for the remainder of the 1990s. Demand growth in developing countries, particularly Asia, remains strong.
In North America, despite continued strengths in natural gas markets, Purvin & Gertz Inc., Dallas, believes NGL pricing will improve gradually, gas pricing will moderate, and gas processing economics will begin recovering.
SUPPLIES, MARGINS
Worldwide, increased supplies of LPG from the North Sea and Venezuela are showing up this year, but most new large, export oriented LPG projects currently being developed will start up in 1996 1997 or later.
Assuming that LPG supply projects proceed according to schedule in Algeria, Nigeria, and Australia, international LPG supplies should expand faster than world LPG demand in the latter part of the 1990s and contribute to increased imports to the U.S. during this period.
Gas processing margins in North America through the 1990s and into the next century will remain positive on average but will continue to be affected by the cyclical nature of the industry.
Continued expansions in North American petrochemical feedstock requirements will improve the longterm prospects for NGL demand and pricing.
Most U.S. olefin plant expansions since the late 1980s have been based on NCL feedstocks. This trend has affected ethane and propane markets positively and improved the longterm prospects for demand and pricing of both ethane and propane.
Demand for propane in other enduse markets continues a modest rate of increase.
Butane markets in North America are continuing to recover from the particularly weak market conditions that persisted in the late 1980s and early 1990s following the implementation of the U.S. Environmental Protection Agency's (EPA) gasoline volatility reduction program.
Demand for isobutane will continue to improve as more isobutane is required for feedstock to methyl tertiary butyl ether (MTBE) plants. The impact of MTBE and reformulated gasoline, however, does not appear to be as dramatic as once feared.
Several companies have elected to defer or cancel butane based MTBE projects because of weak market conditions and lower MTBE demand projections.
RELIEF IN SIGHT
The commissioning of several new international LPG supply projects will result in a rapid build up of LPG production over the next 5 gears.
Despite strong demand for LPG worldwide, the supply outlook provides some relief from the relatively tight LPG supply/demand balances which have emerged over the last few years. The definitive outlook for the international LPG industry will, however, depend upon the start up schedule and build up profile for these emerging new supply projects.
These factors, in turn, will be influenced by political as well as commercial realities of the industry.
International LPG supplies in 1993 grew to an estimated 158 million metric tons (5.1 million b/d).
This growth represents a 4% increase from the previous year and is highlighted by near record production in the U.S., significant build up of Canadian exports, record exports from Saudi Arabia, a more than doubling of supplies from Kuwait, and the beginning of a major build up in North Sea production.
By 2000, world LPG supplies are forecast to increase to more than 202 million metric tons (6.5 million b/d; Fig. 1).
The Middle East will continue to lead future growth in international LPG supplies in the medium term. Significant supply growth, however, is also expected from Africa, Latin America, Asia, and areas of the C.I.S.
Saudi Arabia will continue to dominate LPG production from the Middle East. No major production increases are likely in the medium term due to a level crude oil production outlook and constraints within Saudi Arabia's master gas system.
LPG production from Iran will increase by early 1995 with the full commissioning of the second gas-processing train at Bandar Iman.
Iraq's emergence as a player in the international LPG industry now appears likely to occur in 1996, assuming that the United Nations removes its sanctions and Iraq completes repairs to war damaged LPG production and export facilities.
LPG supplies in Kuwait increased by nearly two and one half times in 1993. Future production levels will be primarily a function of crude oil rates.
The outlook for LPG production from Qatar has stabilized despite plans for several LNG projects. At this time, Qatar will leave most of the potential LPG production in the LNG exported from the country.
LPG production increases from Abu Dhabi are on schedule with the imminent commissioning of the Das Island LNG expansion and the subsequent start up of the onshore gas-condensate recycling project in 1996 (OGJ, Apr. 5, 1993, p. 25; Sept. 6, 1993, p. 30).
EUROPEAN, ASIAN PRODUCTION
The build up in LPG supplies from the North Sea will be significant this year as the first full year of production from the Sleipner field development is realized.
LPG production from the former Soviet Union and Eastern Europe will increase in the medium term as the region reaps the benefits of economic restructuring and the continued introduction of Western capital and technology.
By 2000, LPG exports will increase as domestic production exceeds the anticipated significant growth in internal consumption.
Growth in Asian LPG production will be led by increased supplies from gas processing in India and expanded refinery supplies in Korea and China. The commissioning of the Northwest Shelf LPG recovery project in 1996 will significantly enhance LPG production in Asia Pacific.
Latin American LPG production will be paced by the near doubling of supplies from several new gas processing plants in Venezuela.
Significant expansions in refinery and gas plant production are also forecast for Mexico, Brazil, and Argentina. The scheduled expansion of LPG production in Algeria and the emergence of Nigeria as a major LPG producer will contribute to the doubling of LPG supplies from Africa by the turn of the century.
While contributions from Latin America and Oceania will increase in significance, the international LPG trade will continue to be dominated by exports from Africa and the Middle East (Fig. 2).
ln 1993, net waterborne exports from these regions accounted for nearly 27 million metric tons. By the turn of the century, the net international LPG trade from these two regions will increase to 37 million metric tons, an increase of nearly 40%.
Throughout the forecast period, LPG exports from Saudi Arabia will decline as domestic consumption increases for MTBE and olefin plant feedstocks.
New export projects in Abu Dhabi will propel the United Arab Emirates into a more significant Middle East LPG exporter by the turn of the century.
The expected emergence of Africa as a more dominant region for LPG exports assumes a successful resolution of the political and economic struggles within the two largest producing countries: Algeria and Nigeria.
Any disruption in the development of the currently advanced supply projects in these countries could alter the expected growth in the international LPG trade.
WORLD DEMAND
Average world LPG demand will grow at about 4%/year through the turn of the century. While all enduse markets will grow, total world LPG demand will be led by the residential/commercial, chemical, and engine fuel sectors (Fig. 3).
The current market share for the residential and commercial sector is about 47%.
Continued firm demand in the developing countries of the Far East, Latin America, and Eastern Europe will help sustain this market share despite the more moderate growth rates in the mature regions of North America, Western Europe, and Japan.
Overall, the residential and commercial market for LPG will enjoy growth rates of 3.5 4%/year.
The petrochemical sector currently accounts for about 23% of total world LPG consumption. Despite downward revisions in MTBE demand forecasts, the increased use of butane as MTBE feedstock will still result in very strong growth for the petrochemical sector.
Continued strong growth in propane use as a petrochemical feedstock (particularly in the former Soviet Union) is also expected to contribute to the firm base petrochemical demand for LPG in many regions of the world.
The expected availability of future LPG supplies for price sensitive market development (as olefin plant feedstock) will also result in increased use of LPG in the petrochemical sector, particularly in the U.S. and Europe.
The recently commissioned flexible feedstock plants in the Middle East and Far East will also participate in the price sensitive market for LPG.
Overall, the petrochemical market for LPG will exhibit growth rates in the range of 5.5 6%/Year. By 2000, the market share for LPG use in the petrochemical sector should expand to about 26%.
Increasing environmental pressures and clean air initiatives will enhance the future growth prospects for LPG as engine fuel, particularly in regions which can offer significant tax incentives or impose federal mandates.
Throughout the forecast period, LPG use in the engine fuel sector will also grow in the range of 5.56%/year. This will result in a market share of about 7% by the turn of the century.
Refinery use of LPG (primarily butane) is being affected by a general tendency toward reduced gasoline vapor pressure.
While reduced normal butane consumption in gasoline blending is being offset somewhat by increased isobutane consumption as feedstock for alkylation and for international production of MTBE, the overall market share for refinery LPG use will decline.
By 2000, the market share for refinery use of LPG will drop to about 6%. The market share for industrial use of LPG will decline to about 11% in 2000.
Increasing competition from natural gas continues to erode this market, despite growth projected in some developing countries.
Although the current outlook for LPG demand appears to be in step with forecast supply build up, it must be emphasized that several new supply projects are being developed in countries with some degree of political instability.
Any significant start up delays, build up delays, or cancellations of projects being implemented could alter the forecast supply/demand outlook. This could perpetuate the recent tight market conditions, particularly during 1996 1998 when the full commissioning of several major projects is anticipated.
U.S. GAS SUPPLY
The U.S. natural gas industry appears finally to have escaped the "gas bubble" syndrome. Natural gas demand continues to expand gradually, and gas deliverability appears to have declined.
As a result, gas supply and demand are considerably tighter than in the early 1990s. Gas markets have turned fairly bullish, and spot U.S. Gulf Coast pipeline gas prices have remained greater than $2/MMBTU for most of the past 18 months.
Despite significant improvement in natural gas prices since the early 1990s, gas drilling activity remains depressed.
The U.S. has a relatively large potential gas reserve base available for development. Unless drilling rates increase over the next few years, however, reserve additions will not keep pace with production.
Purvin & Gertz' outlook for natural gas prices has drilling activity increasing during the 1990s but proved reserves gradually declining. This trend, if it continues, will affect development of price sensitive gas markets (primarily in the industrial and electric power generation sectors) by the end of the decade.
Purvin & Gertz expects Lower 48 dry gas production to increase from about 17.5 tcf in 1993 to around 18.7 tcf in 2000.
Associated natural gas will continue to decline during this period as Lower 48 crude oil production rates continue to slide. Nonassociated natural gas production rates will increase as associated gas supplies decline and gas demand continues to grow.
Reduction in associated gas volumes is particularly significant to gas processing because associated gas, typically rich, results in considerably higher NGL production rates per unit of gas volume compared to nonassociated gas.
This shift in gas quality will offset the effect of increasing natural gas production rates on NGL supplies, particularly butane and natural gasoline.
PROCESSING ECONOMICS
The gas processing industry has weathered many changes since the mid 1980s. Low processing margins resulted in the late 1980s as NGL prices were depressed due in part to ethylene feedstock economics.
During this period, heavy feedstocks, such as naphtha and gas oil, were generally favored over NGL feedstocks. This reduced the overall demand for NGL and held down ethane and propane prices.
The implementation of Phase I of the Environmental Protection Agency's (EPA) gasoline Rvp reduction program in 1989 also caused butane prices to decline during this period.
The gas processing industry is, by its very nature, cyclical: margins can rise or fall rapidly with shifting pressures in the oil and gas markets. The 1990s have been no exception to this generalization.
Gas processing margins shot up sharply in 1990 on the heels of strengthening crude oil and NGL prices. Margins stayed relatively high in 1990 and 1991 as natural gas prices languished.
Since 1991, natural gas prices have increased dramatically and gas processing margins have been severely squeezed.
Ethane recovery has become uneconomical for many of the outlying regions that incur high transportation costs to ship NGL to the U.S. Gulf Coast for fractionation.
Processing of lean gas has not generally been attractive over the past year.
All of this has led many industry observers to question the future profitability of the gas processing industry.
Gas processing economics vary significantly from plant to plant. Margins depend on the location and size of the plant, the quantity and quality of natural gas being processed, operating efficiencies, and many other factors, including contractual terms between the processor and the producer.
Trends in gas processing margins in the Permian basin in West Texas, one of the U.S.' largest NGL producing regions, indicate the general profitability of the industry.
The outlook for gas processing margins in the Permian basin is presented in Fig. 4. The Permian basin margin is based on typical plant characteristics (capacity, inlet gas composition, recovery efficiency) of cryogenic gas plants in the region.
For this type of analysis, the plant is assumed to produce a mixed NGL stream that is transported to Mont Belvieu, Tex., for fractionation and storage. The gas processor is assumed to pay the gas processor residue gas value for the BTUs recovered as NGL and consumed as fuel.
Plant gate prices for NGL reflect U.S. Gulf Coast pricing less transportation and fractionation costs.
As discussed, gas processing margins have dropped steeply from the high levels enjoyed in the early 1990s. Although the currently depressed level of processing margins threatens the short term viability of many gas plant operators, it appears to be near the bottom of the profitability cycle.
Purvin & Gertz expects margins to improve gradually over the next few years.
In the first half of 1994, natural gas prices have generally remained strong in spite of weakening crude oil and refined products pricing. Natural gas prices will moderate somewhat over the next 1 2 years if crude oil and residual fuel oil prices remain weak.
This should improve gas processing margins slightly. Continued improvement will occur over the remainder of the 1990s as crude oil and refined products prices gradually strengthen from currently depressed levels.
NGL prices are heavily influenced by petrochemical feedstock economics and refining economics, both of which depend on crude oil pricing. If crude oil markets perform better than expected, gas processing margins would be expected to exceed Purvin & Gertz' current forecast.
U.S. NGL SUPPLY
The U.S. NGL industry is the largest, most highly developed, and most complex in the world. NGLs extracted from gas processing plants are typically transported by long distance pipeline to fractionation and storage centers (Mont Belvieu, Tex., and Conway, Kan., for example).
In the U.S., NGL is produced from two sources. NGL is extracted from natural gas in gas processing plants and is produced from crude oil in refineries. As a result, future NCL supply levels depend on many complex variables that affect the natural gas, gas processing, and refining industries.
Gas processing accounts for about 74% of total NGL supplies in the U.S., including essentially all of the ethane and natural gasoline supplies. Refineries are key sources or propane (48% of total supplies) and have become significant sources of total normal butane supplies (38% of total supplies) in recent years.
Fig. 5 presents Purvin & Gertz' outlook for U.S. NGL supplies. In total, U.S. production of NGL will continue to increase gradually during the rest of the 1990s. But the rate of increase has slowed considerably since the early 1990s.
During the first part of the 1990s, high gas processing margins provided gas processors with a strong incentive to boost NGL recovery levels. This led to an increase of about 11% in NGL supplies between 1990 and 1993.
Total domestic NGL supplies are expected to moderate slightly in 1994 as a result of the effect of weak gas-processing margins on NGL recovery levels.
U.S. ethane production rose sharply in the early 1990s, rising from about 490,000 b/d in 1990 to around 580,000 b/d 1993. This dramatic increase in ethane production was due to two factors: strong ethane recovery margins and a gradual increase in natural gas available for processing.
Because ethane recovery margins have weakened considerably in the past year, some decline in ethane supplies will occur over the near term.
Ethane production will decline to 560,000 570,000 b/d in 1994, then gradually increase through the second half of the 1990s as margins improve.
As with ethane, U.S. propane production rose sharply in the early 1990s. Total domestic propane supplies increased from about 890,000 b/d in 1990 to around 960,000 b/d in 1993. This represents an increase of about 8% over the 3 year period.
The rise in production resulted from increased extraction from natural gas as well as higher refinery propane production levels.
Increased propane production from gas processing in part resulted from strong processing margins that prevailed during most of the period. Refinery production of propane has continued to rise as refinery conversion levels increase.
U.S. propane production will decline slightly in 1994 for the same reasons that ethane supplies are slipping. Weak gas processing economics are overshadowing the effect of strong gas demand on gas processing activity and NGL recovery levels.
If margins weren't depressed, Purvin & Gertz would anticipate a noticeable increase in ethane and propane production in 1994 with natural gas production levels at high levels to rebuild gas inventories.
Domestic propane supplies will gradually increase during the rest of the 1990s, following the temporary slide that is occurring in 1994. Total U.S. propane production will approach 990,000 b/d by 2000. It should be noted, however, that propane production from gas processing will gradually decline during the period as the average gas quality slowly diminishes.
This shift in gas quality results from declining associated gas production rates, as already mentioned. Refinery propane production will increase throughout the 1990s and more than compensate for the decline in production from gas processing.
BUTANE SUPPLIES
Normal butane supplies have increased significantly since the late 1980s as a result of reductions in summertime gasoline volatility (Rvp) specifications.
Refineries have been forced to back out large quantities of butane from gasoline blends to meet lower summertime Rvp specifications set by the EPA and state environmental agencies.
Most high conversion refineries now have surplus butane during the summer months and move this surplus to storage or external sales or both.
Domestic normal butane supplies increased from about 290,000 b/d in 1990 to around 330,000 b/d in 1993. The increase resulted primarily from the dramatic increase in refinery production of normal butane.
Supplies from gas processing increased only marginally during the period.
U.S. normal butane supplies will increase to around 370,000 b/d by 2000. During this period, supplies from gas plants will continue to decline as the average gas quality diminishes somewhat.
Refinery supplies will continue to increase as gasoline Rvp levels are reduced in several markets affected by environmental legislation.
Isobutane and natural-gasoline supplies increased during the early 1990s as a result of higher gas processing activity. These trends in isobutane and natural gasoline supplies will not continue; these supplies will gradually decline during the rest of the 1990s because of the shift in natural gas quality mentioned earlier.
DEMAND INCREASE
Fig. 6 presents Purvin & Gertz' projection of NGL demand by component.
Total U.S. demand for NGL increased almost 10% between 1990 and 1993. Demand rose from about 2.2 million b/d in 1990 to nearly 2.4 million b/d in 1993.
Demand increased for all NGLs except for normal butane during the period. The most significant increase in NGL demand was the increased use of ethane and propane as petrochemical feedstocks.
Imports increased slightly during the period, but most of the increase in demand was met with higher domestic NGL production levels.
Essentially all (more than 97%) of U.S. demand for ethane is for use as ethylene plant feedstock. Ethane demand as ethylene plant feedstock will continue to grow as long as additional economical supplies of ethane are available.
Total U.S. demand for ethane has increased significantly since the start of the decade, rising from about 510,000 b/d in 1990 to around 590,000 b/d in 1993.
This 16% increase in consumption is attributable primarily to two factors:
- Economical ethane supplies increased significantly because of strong extraction economics during most of the period.
- Petrochemical feedstock requirements continue to expand and most ethylene capacity added in the late 1980s and early 1990s was based on NGL feedstocks (primarily ethane and propane).
Ethane has generally been an economical feedstock during the 1990s which has supported higher consumption levels.
Ethane demand will decline slightly in 1994 as a result of competitive feedstock pressures and a temporary decline in domestic supplies and imports from Canada. Over the longer term, Purvin & Gertz expects ethane demand to rise gradually provided that sufficient economical supplies are available.
Demand will be around 610,000 b/d in 2000 based on Purvin & Gertz' outlook for domestic supplies and imports. Canadian imports will average about 20,000 b/d but could be significantly increased if additional pipeline capacity were available and ethane export economics were attractive to Canadian producers.
U.S. demand will exceed the current forecast if additional imports are available.
Future demand for propane will be influenced primarily by growth in three markets: residential and commercial, petrochemicals, and engine fuel. Demand growth will occur in each of these markets during the forecast period.
Overall, propane demand growth will average about 2.5%/year during the rest of the 1990s with total U.S. propane demand approaching 1.2 million b/d by 2000.
Residential and commercial demand declined in the early 1980s as a result of higher energy prices, increased conservation, and extension of natural gas distribution systems. Since 1985, propane demand has steadily increased in the residential and commercial end use sector (on a temperature adjusted basis).
Demand growth in this market appears to have slowed somewhat in recent years, but this may be attributable in part to the impact of lower economic activity. Annual propane demand in this end use sector will increase at an average rate of 1 1.5% during the forecast period.
It should be noted, however, that demand growth in this sector is very regional with some markets growing while others decline.
PLANT FEEDSTOCK
Demand for propane as petrochemical feedstock varies greatly because of competition in the petrochemical industry and the significant feedstock flexibility that exists in many crackers.
Propane cracking rates can be adjusted quickly in flexible olefin plants as feedstock economics change in response to shifts in feedstock and ethylene co product markets. This has been the case in recent years with petrochemical feedstock markets serving as the swing demand to balance propane supply and demand.
Propane consumption as olefin plant feedstock has varied between about 240,000 b/d and 320,000 b/d since 1990.
Analysis of the international propane supply/demand balance indicates that world propane supplies will expand faster than base demand during the second half of the 1990s. Consequently, the quantity of propane available for price sensitive markets in the world will increase.
As a result, use of propane as olefin plant feedstock in the U.S. and the level of waterborne imports will rise in the second half of the decade.
Potential for increased use of propane as engine fuel in large U.S. transportation markets exists. Clean and alternative fuels legislation is stimulating more interest in clean fuels such as propane and CNG.
Propane engine fuel markets are flat, however, and the current oil price outlook and federal and state tax policies do not appear favorable for significant penetration of the private vehicle transportation sector.
Some portion of the fleet vehicle market will switch to propane. Reformulated gasoline, however, will capture most of the clean fuels demand affected by federal and state legislation.
Purvin & Gertz expects engine fuel demand for propane to expand by the end of the 1990s but not to have a major impact on the propane market.
The outlook for butane demand includes prospects for flat to declining demand for normal butane and growth in isobutane demand. Demand for normal butane has declined as summertime gasoline Rvp levels have steadily dropped over the last several years in the attempt to bring U.S. cities into compliance with federal air standards.
Tighter Rvp specifications have forced refineries to reduce the quantity of normal butane blended into gasoline which has led to a dramatic reduction in net refinery demand for normal butane.
This trend will continue in the future with total U.S. demand for normal butane, other than as butane isomerization feedstock, to continue to decline.
Isobutane demand has been increasing primarily as a result of additional MTBE production from butane based MTBE plants. Total U.S. isobutane demand has increased from about 190,000 b/d in 1990 to more than 220,000 b/d in 1993.
Isobutane demand will continue to increase in 1994 and during the balance of the forecast period as MTBE production in existing plants is increased, additional butane based MTBE and propylene oxide/tertiary butyl alcohol/MTBE capacity is brought on line, and refinery demand for isobutane increases.
Total U.S. demand for isobutane will be about 330,000 340,000 b/d by the end of the decade.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.