Rick R. Haun
Purvin & Gertz Inc.
Dallas
Ken W. Otto, S. Craig Whitley
Purvin & Gertz Inc.
Houston
Worldwide demand for NGLs is booming. In the international LPG market, demand growth is particularly strong in the developing markets in Asia. Demand has risen sharply in China, requiring significant imports to balance the market.
Overall net LPG imports to Asia will continue to expand through 2000 as demand growth continues to outpace regional supply build-up.
In North America, increased NGL demand is resulting from strong growth in petrochemical-feedstock markets. The surge in olefin demand experienced in 1994 has led to a noticeable expansion in total feedstock requirements.
This trend, combined with a reasonably flat outlook on regional NGL supplies, should result in a continuation of the tightening in regional NGL supply and demand, particularly for ethnic and propane.
Natural gas prices have eased somewhat relative to 1993 and early 1994. Gas-processing economics have therefore improved since along with the long-term outlook for industry profitability.
WORLD DEMAND
Recent demand for LPG around the world has grown rapidly, increasing about 19% between 1940 and 1994. Markets for LPG have expanded in all end-user sectors during this period.
Growth has been particularly strong, however, in residential/commercial and petrochemical sectors.
Demand for LPG will continue to exhibit strength in these applications and world LPG demand growth should average about 3.8%/year through the turn of the century (Fig. 1 (65760 bytes)).
The residential and commercial sector is the largest single end-user market for LPG, accounting for about 48% of total world demand. Growth in this sector remains strong, averaging almost 5%/year since 1990.
LPG market activity in residential and commercial markets, however, varies significantly in different regions of the world. Demand growth has been particularly strong in Asia, averaging more than 8%/year since 1990.
Consumption of LPG in this sector has also expanded rapidly in many developing countries in Africa, Latin America, and the Middle East. Growth has been more moderate, in the relatively mature markets in North America, Western Europe, and Japan.
The rapid expansion of LPG use in Asian residential and commercial markets is dramatically affecting the international LPG markets. Asian demand in this sector alone has increased from 14.7 million metric tons (mt) in 1990 to 20.2 million mt in 1994.
This increase, along with growth in other end-use markets, has prompted the need for significantly higher levels of LPG imports into the region. Net import requirements in Asia have expanded by more than 4.3 million mt/year (mty) since 1990.
This has absorbed most of the incremental supplies from the Middle East and kept the international supply/demand balance relatively tight.
The petrochemical sector is the other major growth market for LPG. This sector currently accounts for around 23% of the total world LPG consumption. Demand for LPG here has increased rapidly, averaging more than 6%/year since 1994.
The major driving forces behind this sharp increase in demand for LPG has beer) the rise in butane-based MTBE (methyl tertiary butyl ether) manufacture and the need for more olefin plant feedstocks in the United States.
The dramatic increase in world MTBE demand has resulted primarily from U.S. clean air legislation adopted in 1990. MTBE plant capacity has significantly expanded in response to the increased need for oxygenates in reformulated gasoline.
Much of this capacity has been based on butane dehydrogenation, significantly increasing the demand for butane feedstocks.
Demand for oxygenated gasoline in the U.S. is expanding but more slowly than previously anticipated. In spite of this slowdown in U.S. MTBE demand growth, worldwide utilization of butane for MTBE manufacture will continue to rise, exceeding 11 million mty by 2000.
Feedstock requirements for worldwide olefin manufacture are expanding, averaging about 4.3%/year since 1990. In much of the world, LPG is only a minor component of the total feedslate (as in Asia) or is consumed almost exclusively as a price-sensitive substitute for naphtha (as in Western Europe).
In the U.S. olefin industry, however, LPG and ethane constitute around 75% of the total feedslate. As the total U.S. feedstock requirements have expanded, demand for ethane and propane has steadily increased, strengthening the long-term value of both in the U.S. market.
WORLD SUPPLY
Several new international LPG-supply projects are anticipated during the second half of the 1990s.
These projects will result in a noticeable increase in world LPG supplies. Total LPG supplies should increase at an average rate of about 3.7%/year through 2000 (Fig. 2 (61362 bytes)). In spite of this increase, base LPG demand growth will slightly outpace supply expansions.
This suggests that LPG markets may remain tight through the end of the decade.
International LPG supplies will rise most rapidly during the forecast period in Africa, Asia, the Middle East, and the former Soviet Union (FSU).
Production in Africa is increasing at an average rate of more than 10%/year through the decade. This is primarily the result of two new LPG-export projects in Nigeria and an expansion in Algeria.
Most of this capacity will be brought on-line between 1997 and 1999.
In Asia, LPG production is increasing rapidly relative to average world rates. Demand is growing so briskly, however, that even with an average supply expansion of 6%/year, higher LPG import levels are required each year.
Supplies in Asia are expanding in two primary areas.
First, demand for refined products in the region is booming and new refinery capacity is being added to keep up with demand. As a result, refinery-LPG production rates are steadily increasing.
Second, gas-processing activity is rising in Southeast Asia. LPG production from gas processing is increasing in Malaysia and Thailand. In addition, new gas-processing capacity is expected to be on-line in Viet Nam in 1997 or 1998.
The Middle East will continue to be the dominant supplier of LPG to international markets. Outside of North America, the Middle East is the largest LPG producing region in the world.
During the forecast period, most major Middle East producing countries will implement new projects for increased LPG recovery from natural-gas processing (primarily for associated gas which is related to crude-oil production).
Saudi Arabia will expand its Master Gas System by the end of the decade to provide capacity to process increasing quantities of gas. The system is currently operating at maximum capacity.
Iran will significantly increase its LPG production as a result of the recent expansion at the Bandar Iman complex, additional gas-processing capacity increases, and higher natural-gas production and processing rates.
Iraq is also expected to emerge as a major LPG producer and exporter upon resolution of United Nations' sanctions and the completion of repairs of war-damaged LPG production and export facilities.
Kuwait reached full production during 1993-1994 and has re-established itself as a major LPG producer and exporter following the disruption of the Gulf conflict. Supplies will gradually increase as crude-oil production expands.
Qatar commissioned the first phase of its North Field project in 1992, which has significantly increased LPG production. Abu Dhabi has recently expanded its LPG production capacity with the addition of a third LNG train on Das Island and development of an onshore gas-condensate recycling project.
As a result, LPG production and exports from the U.A.E. are expanding.
LPG production in the FSU has dropped significantly in recent years, by almost 30% since 1990. Production will rebound somewhat during the rest of the 1990s with introduction of western capital and technology.
Over the longer-term, significant potential exists for further expansions of LPG supplies from the FSU. This will require new pipeline capacity for delivering LPG supplies from West Siberia to domestic and export locations and development of production from Sakhalin Island.
LPG supplies are also increasing in Western Europe as new North Sea gas/gas-condensate fields are developed. The build-up in North Sea LPG supplies, which began in 1993-1994, is significantly increasing regional supplies.
North Sea LPG supplies have increased by about 75% since 1990 and will continue to rise through the end of the decade. Refinery supplies are not increasing, but the significant increase in North Sea supplies is providing additional feedstock for the European olefin industry and new trading opportunities.
INTERNATIONAL TRADE
The Middle East is the dominant source on LPG exports in the international market. Together with Africa, these two regions accounted for nearly 28 million rut of net waterborne exports in 1994.
Exports from these regions will expand throughout the rest of this century and reach nearly 38 million rut in 2000 (Fig. 3 (37174 bytes)). Thus, an expansion of more than 35% of net exports from Africa and the Middle East will occur during this period.
This will undoubtedly require expansion of LPG shipping fleets and possibly the addition or expansion of import and export terminals.
Asia will be the primary growth market absorbing these additional supplies. This growth is being driven by rapid expansion of the Chinese and Indian markets, as well as continued demand growth in Korea and much of Southeast Asia.
Higher LPG prices that have resulted since the introduction of the new Middle East pricing last fall, however, may disrupt this trend.
If Chinese prices prove to be too high, the push toward greater LPG market penetration may stall, tempering the need for imports. Were this to occur, the market tightness experienced over the last several years could vanish, at least temporarily.
U.S. PROCESSING
The U.S. gas-processing industry has endured relative weakness over the past 2 years after particularly strong margins in 1990-1992. Processing margins (Fig. 4 (22543 bytes)) peaked in the early 1990s as natural-gas prices languished, while NGL prices gained momentum.
But processing margins slipped rapidly during 1993 and 1994 as natural-gas prices rebounded sharply from the depths of 1991. NGL prices have eased somewhat since the early 1990s as crude oil and refined products prices have weakened. This is another factor that contributed to the slide in processing margins.
Overall, gas-processing margins have improved somewhat in 1995 due partly to a weaker-than-expected natural-gas market. Plant profitability is up this year but well below what was experienced in the first part of the decade.
Despite a drop in natural-gas prices, ethane-extraction economics have been squeezed. Petrochemical markets and prices have skyrocketed over the past year. Propylene markets have tightened significantly during this period.
As a result, propylene prices have risen sharply, providing a greater incentive to crack propane over ethane in flexible olefin plants. This has held down ethane prices at least in the short-term.
Overall, U.S. gas-processing margins should continue to improve later this decade as this demand for NGL products remains strong, particularly in the petrochemical feedstock sector.
NGL prices should therefore increase faster than petroleum. In fact, NGL prices could increase sharply in the late 1990s if petrochemical demand for ethane and propane outstrips available supplies.
Of several ethylene plant expansions in progress or being planned, most rely heavily on ethane and propane feedstocks. As a result, the base demand for both of these feedstocks continues to increase.
The economics of ethane extraction should improve over the next few years. While natural-gas prices will resume rising in 1996, ethane prices should increase faster.
Ethane-recovery economics should be profitable on average for most regions.
Ethane recovery in the Overthrust will remain marginal through much of the mid-1990s but gradually improve. By 2000, ethane extraction in the Overthrust will be positive.
U.S. NGL SUPPLY
The U.S. NGL industry is the largest and most complex in the world.
A large pipeline and underground storage infrastructure transports NGL production from Canadian and U.S. gas-processing plants to storage and distribution in Conway, Kan., and Mont Belvieu, Tex.
The Mont Belvieu NGL fractionation and storage center, the largest in the world, is designed to receive gas liquids via pipeline, truck, rail, and sea. Propane and butane imports by water are received from the Middle East, Algeria, the North Sea, Venezuela, and Mexico.
Because most supplies of NGLs to the U.S. originate from domestic natural-gas processing plants and refineries, future supplies depend on many complex variables that affect gas-processing economics and refinery operations.
U.S. gas-plant production accounted for approximately 74% of total domestic NGL supplies in 1994, including 95% of all ethane supply and 100% of all natural-gasoline supplies. Refineries play a very important role in domestic propane supply, accounting for approximately 47% of U.S. propane production in 1994.
Since implementation of EPA summertime gasoline volatility (Rvp) reduction regulations in 1989, U.S. refinery production of n-butane has increased considerably because very little refinery butane production can be blended into the gasoline pool for Rvp enhancement during the summer months.
In 1994, refinery n-butane production accounted for 32.5% of total U.S. n-butane production. It should be noted, however, that most refiners now store their surplus n-butane for later use as a gasoline blendstock during the winter months.
In total, U.S. production of NGLs will increase gradually during the remainder of the decade (Fig. 5 (58088 bytes)). But the rate of increase has slowed considerably since the early 1990s.
PRODUCTS' FUTURES
U.S. ethane production from both gas plants and refineries rose sharply in the early 1990s, from 480,000 b/d in 1989 to 580,000 b/d in 1993. Despite poor extraction margins, U.S. ethane supplies increased in 1994 to approximately 590,000 b/d.
Domestic ethane supplies will expand gradually during the balance of the 1990s. Thereafter, domestic ethane supplies will remain flat. Ethane-recovery levels will gradually improve through the 1990s as ethane-extraction economics improve and remain positive in most regions.
The increase in ethane production from gas processing will be limited because the gas available for processing will become increasingly leaner as associated-gas production declines.
Most new gas available for processing will be leaner, particularly offshore gas production increases envisioned for the Gulf of Mexico.
An expectation for higher refinery yields of propane and propylene suggests an overall positive growth in total domestic supplies of propane throughout the forecast period. Total domestic supplies of propane should increase from 970,000 b/d in 1994 to around 990,000 b/d in 2000.
Future production of butane and natural gasoline from U.S. gas plants will gradually decline throughout the forecast period. Declines in associated-gas production strongly influences similar declines in production of butanes and natural gasoline.
Increases in deeper extraction technology will have little effect on future production of butanes and natural gasoline because recovery rates of the butanes and heavier already meets or exceeds 97% of potential production levels from existing gas plants in the US.
This is in sharp contrast to the production improvements that can be accomplished with ethane cryogenic technology enhancements.
Although butane production from gas plants will gradually decline, refinery production of n-butane will grow under requirements of the Clean Air Act to implement future Rvp reductions in the U.S. gasoline pool.
Refinery-butane production has risen substantially since implementation of EPA's first phase of Rvp controls in summer 1990.
Since then when refinery n-butane production averaged about 67,000 b/d, refinery production levels of n-butane have averaged as high as 114,000 b/d in 1992 when the second round of summertime Rvp controls was implemented and averaged approximately 109,000 b/d in 1994 after slipping to 96,000 b/d in 1993.
Each Rvp resection on the US, gasoline pool forces refiners to reject greater quantities of n-butane from the gasoline pool to meet EPA and state requirements.
N-butane is the optimum blendstock to be rejected in the process of lowering gasoline volatility because its blending vapor pressure is by far the highest of any blendstocks that go into the gasoline pool.
Summer 1995 marks the third round of summertime gasoline volatility restrictions implemented by the EPA in the 1990s. Although lower Rvp levels to control evaporative emissions of hydrocarbons are likely, the effect on n-butane may prove less threatening than the effect on natural gasoline.
Several U.S. refiners are already rejecting maximum n-butanes in summer Their refinery configurations are making it difficult for some refiners to meet new Rvp regulations, even after they reject virtually all n-butane from their gasoline production.
Hence later rounds of Rvp control may force some refiners to reject the C5 portion of their gasoline pools unless changes are made in refinery configurations. It should be noted, however, that this problem currently represents a dilemma for only a few refineries and is abnormal.
Future Rvp restrictions will therefore still result in higher levels of refinery-butane production.
Gas-plant production of n-butane increased slightly in 1994 while isobutane production from gas plants realized a modest decline. Refinery production of isobutane plays a minor role in total isobutane supply in the U.S., averaging only about 13,000 b/d in 1994.
Isobutane production from merchant butane-isomerization plants in the U.S. has grown from 58,000 b/d in 1990 to 90,000 b/d in 1994. Current production from merchant isomerization units now exceeds U.S. gas-plant production of isobutane when the spread between spot n-butane and spot isobutane prices is profitable for isom operation.
Production of isobutane from merchant butane-isomerization plants has been limited to contract volumes only for most of the past year due to slim margins between n-butane and isobutane prices on the U.S. Gulf Coast.
(More on this issue presently in the outlook for butane demand.)
After rising from 310,000 b/d in 1990 to more than 330,000 b/d in 1993, gas-plant supplies of natural gasoline slipped slightly in 1994.
Imports of natural gasoline have risen each year since 1990. Total U.S. imports of natural gasoline averaged more than 39,000 b/d in 1994.
These imports will increase modestly until 2000 with additional availability of international supplies and increased requirements for light naphtha feedstock for Gulf Coast olefins, plants.
Although natural gasoline accounts for less than one-third of the light naphtha feedstock used by olefins crackers, future growth in ethylene capacities on the Gulf Coast will result in greater imports for all NGL feedstocks.
U.S. NGL DEMAND
With the exception of ethane, total demand for all other NGLs continued to grow in 1994, with propane growing by 8% over 1993 demand. Chemical demand for propane exceeded 11% in 1994, sparked by the rapid rise in spot propylene prices that led to greater use of propane as an olefins-plant feedstock.
Total ethane demand declined from about 620,000 b/d in 1993 to around 610,000 b/d in 1994 due to cracking economics that favored other feedstocks. With the decline in ethane demand, total U.S. ethane stocks rose from about 15 million bbl in March 1994 to more than 25 million bbl in December 1994.
Although demand for propane in residential/commercial heating plummeted during winter 1994/95 because of record warm temperatures, total 1994 demand for propane from this market realized a yearly gain of about 27,000 b/d because of a 2-month record cold period and stock drawdown during January and February 1994.
Growth in n-butane demand during 1994 shot up 13.3% over 1993, with petrochemical demand for n-butane exhibiting a 33,000 b/d jump over the previous year. Refinery demand for n-butane remained flat with 1993, averaging 152,000 b/d.
Although demand for n-butane as isom-plant feedstock rose 9,900 b/d with increased demand for high-purity isobutane, demand growth fell far short of previous projections due to poor isomerization operating margins.
Isobutane demand for chemical consumption jumped about 26,000 b/d or 31% in 1994 as new propylene oxide production capacities came on stream and butane-based MTBE production increased to meet reformulated gasoline needs.
Refinery demand for isobutane as feedstock for refinery alkylation units declined slightly in 1994.
Total demand for natural gasoline rose 11,100 b/d in 1994, or 3.1% above 1993 levels. The slight rise in demand derived from greater use of natural gasoline as an olefins feedstock and increased use of natural gasoline as a diluent in heavy crude oil.
Most of the latter increases occurred in the Midcontinent where Rvp regulations have prompted some refiners to reject pentanes from the gasoline pool. Some surplus production in this region has found its way back to refineries after being marketed as a crude-oil diluent.
Demand for ethane will increase throughout (Fig. 6 (62559 bytes)) as cracking economics improve for the feedstock in second half 1995, and continued expansions of ethane-cracking capacities will result in a substantial increase in ethane demand.
U.S. ethylene capacities will grow from around 48 billion lb/year in 1994 to more than 58 billion lb/year in 2000. Current announced expansion plans total 5.9 billion lb, and new ethylene plant additions later this decade should total or exceed another 1.6 billion lb/year.
Base ethane demand due to these new capacities will increase between 60,000 and 100,000 b/d by 2000. If new NGL-based ethylene-plant additions exceed 1.6 billion lb/year, total ethane demand could rise as much as 23,500 b/d for each additional 1 billion lb/year of new ethane-based ethylene capacity.
Total propane demand for olefins cracking has grown considerably since the rapid run-up in propylene prices in 1994 that increased profits on propane cracking.
As propylene supplies increase to improve the balance between supply and demand, spot propylene prices will soften and propane cracking margins should decline closer to gross margins on ethane cracking.
This will moderate propane-cracking demand temporarily in late 1995 and early 1996. But ethylene capacity expansions in 1996-1998 will result in greater demand not only for ethane as an olefins feedstock but also for propane.
Most of the demand growth for propane will be in petrochemicals. Residential/commercial heating-fuel demand is extremely weather-related, but long-term growth in this market will not exceed 1.5%/year.
Propane consumption as a motor fuel will grow but continues to lose potential new-market share in transportation to reformulated gasoline and compressed natural gas. Most propane demand growth in motor fuel Will Continue to be limited to fleet-conversion programs.
N-BUTANE'S CLOUDY FUTURE
N-butane continues to remain the most difficult NGL product for which to forecast demand growth and trends. Although industry personnel point to the large jump in isobutane demand for MTBE and to propylene-oxide production as being the largest change in butane demand over the past 2 years, overall demand for gas-plant quality isobutane has changed very little.
The reason is simple: Both MTBE and propylene-oxide production processes require high purity, isom grade, isobutane for feedstock, and little gas-plant production makes its way into these sectors.
Thus, for every 1 gal of new, isom-quality isobutane these markets consume, 1 gal of gas-plant quality n-butane is required for butane isomerization.
Additionally demand growth for n-butane as an olefins-plant feedstock also implies increased demand for gas-plant quality n butane because fluoride contamination in refinery butanes wreaks havoc on olefins crackers.
The only exception is that both of these processes, isomerization and olefins cracking, can use refinery butanes if olefins and fluorides contaminants have been removed via proper treating. (Olefins pose no problems for olefins crackers.)
Only one company however, currently has treating facilities for refinery-grade butanes. This capacity falls far short of the total gas plant n-butane demand increases witnessed in MTBE, propylene oxide, and ethylene-cracking markets over the past year.
Hence, the net impact on butane demand from these three markets has resulted not in greater demand for existing isobutane supplies but in greater demand for existing supplies of gas plant n-butane. All new isobutane demand growth has been for new, incremental market supply from isom plants, not for gas-plant quality isobutane.
This phenomenon has been clearly demonstrated over the past 2 years in the continued tightening of the price spread between Mont Belvieu spot n-butane and Mont Belvieu spot isobutane prices, sometimes to negative margins.
The U.S. NGL industry must acknowledge that no inflexible rule dictate that isobutane prices must at all times be higher than n-butane prices.
Investment in additional refinery butane treating capacities or imports of large volumes of n-butane are necessary to keep the price spread between butanes wide enough to justify either profitable isom operations or lower costs associated with isom-quality isobutanes, or both.
Although spot prices for refinery butanes are not published or quoted, they generally trade about $0.03/gal lower than gas plant n-butane prices.
Hence, for those companies that require and purchase isom-quality isobutane on n-butane-plus pricing basis, their net cost for isobutanes is likely to run higher than spot isobutane prices anytime isobutane stocks are not considered tight.
The reason is that their price is based on a commodity (n-butane) that has experienced phenomenal growth in the past 3 years, and their price goal (spot isobutane prices) is based on a commodity (gas-plant isobutane) that has experienced very little demand growth over the past 3 years.
Another contributing factor to these recent changes in butane demand and prices is the supply side of the equation, in particular, the handling of stir-plus n-butane.
Most U.S. refineries have taken the same approach to handling surplus refinery-butane production in the summer, placing it in underground storage for use as gasoline blendstock during winter.
Intentional storage, surplus or not, removes spot supplies from the marketplace and generally results in firmer market prices. This strategy, conducted as it is by almost all refiners, has led to firmer spot U.S. Gulf Coast n-butane prices during summer and recently to much poorer-to-non-existent butane isomerization operating margins.
The decline in the butane-price spread limited butane-isomerization production to only contract-production rates during most of 1994 and early 1995.
As a result, isobutane stocks plummeted over a 6-month period before overall demand for gas-plant quality isobutane, combined with the springtime plummet in n-butane demand, triggered higher spot isobutane prices and a return to profitable butane-isomerization margins.
This cycling of the butane price spread will continue with spot n-butane prices rising to greater than isobutane prices for brief periods (as in 1994) unless substantial investment is made in additional treating capacity for either refinery butanes or gas-plant isobutane.
Overall, n-butane demand for olefins cracking will decline from current record high levels to average 30,000 b/d. Isobutane demand will increase with future growth in the MTBE, propylene oxide, and refining markets.
Refinery demand for isobutane will grow because reformulated gasoline regulations will result in substantial growth in U.S. alkylation capacity, particularly on the U.S. West Coast. Because this market requires isom-quality isobutane as feedstock, it should aid in firming spot isobutane prices.
Overall demand growth for natural gasoline will be modest when compared that for other NGLs. As mentioned, modest improvement will occur in natural gasoline as an olefins feedstock, but this market currently accounts for less than one-third of total natural-gasoline demand.
