Rick R. Haun, E.E. Ellington, Ken W. Otto, Richard J. Harrison
Purvin & Gertz Inc.
Dallas
Gas processing in general will remain profitable during the 1990s, although gas-processing margins will decline somewhat from the lofty levels of 1990-91.
This decline will result from natural-gas prices increasing faster than NGL prices during the next few years. The quantity and quality of gas available for processing will also gradually decline.
Those plants with an assured supply of suitable gas will profit. Plants with insecure or declining gas supply will have to compete aggressively for new supplies, consolidate with other plants in an area, or shut down.
Another result of the expected decline in the quantity and quality of gas available for processing will be that new grassroots projects will become endangered.
Overall, NGL production will likely increase in the U.S. through the remainder of the decade. Declining NGL supplies from gas processing (with the exception of ethane) will be more than offset by increased refinery production of propane-propylene and butane.
Increased ethane-recovery levels will compensate for declining volumes of natural gas processed.
Demand for all NGL products will firm over the forecast period. Ethane will find a ready market as a petrochemical feedstock in existing and new olefin plants. Propane growth will be stimulated by the residential-commercial, engine fuel, and chemical sectors. Demand in the chemical sector will be boosted by increasing international availabilities.
The butane market will be buoyed by the growth in methyl tertiary butyl ether (MTBE) feedstock demand. Increasing imports will be required to support this fast growing market which has been stimulated by clean-air legislation mandating minimum levels of oxygen in gasoline.
The demand for natural gasoline will also remain firm as a gasoline blendstock and will contribute to the general strengthening in prices expected for all NGL products in the U.S.
GAS SUPPLY, PRICES: U.S.
The outlook for the production of U.S. gas suitable for processing is pessimistic.
The rig count remains at the lowest level in almost 50 years, and many of these rigs are drilling for tax-subsidized coalseam and tight-sands gas (Section 29), much of which is unsuitable for processing.
Drilling for conventional gas will increase as gas prices increase, and technological improvements may raise the finding rate. These factors, however, will not result in sufficient new conventional gas production to reverse the decline.
As shown in Fig. 1, Lower 48 conventional dry-gas production will gradually decline from about 17.4 tcf in 1991 to 16.9 tcf in 1995 and 16.8 tcf in 2000.
Fig. 1 does not show that an increasing portion of total conventional production will be lean gas.
Declining conventional production will be replaced by increasing volumes of Section 29 tax-credit gas, increasing imports from Canada, and LNG from Algeria.
Unconventional gas supply, which includes Section 29 tax-credit gas, and supplemental supplies (primarily propane-air for peak shaving) will increase from about 0.5 tcf in 1991 to about 1.1 tcf in 1998 and thereafter.
Imports from Canada will probably reach 2.6 tcf/Year. LNG imports will increase to about 0.4 tcf/Year by 2000.
The so-called gas "bubble," first evident in 1982, has apparently burst.
The primary cause of the bubble was decreased demand resulting from energy conservation after the 1979 Iranian crisis and general economic recession. For several reasons, including clean-air initiatives, demand is now increasing.
Increasing demand and decreasing conventional gas production will lead to a supply constrained market over the next few years. This market will permit gas prices to rise from recent low levels to approximately burner-tip parity with low-sulfur residual fuel oil. But gas prices will not exceed such parity for any prolonged period.
Fig. 2 shows the forecast for wellhead prices for the major producing areas of the U.S. The annual average Gulf Coast price will be $1.37/MMBTU in 1992, increasing to $1.85/MMBTU in 1995, and $2.13/MMBTU in 2000.
The recent dramatic unseasonal gas-price increases may indicate a forward shift in the price profile.
The expected gas-price increases during the next few years will exceed increases in NGL prices. How gas-processing margins will be affected is discussed later.
NGL PRODUCTION, DEMAND: U.S.
Total U.S. production of NGLs will gradually increase during the 1990s. Purvin & Gertz' projection of domestic NGL production appears in Fig. 3.
Included there is an anticipated increase in refinery LPG supplies which will more than offset the decline in NGLs from gas processing. Refinery supplies of butane will increase primarily as a result of motor-gasoline volatility changes, and refinery propane-propylene supplies will increase as refinery utilization and conversion levels rise.
With the exception of ethane, the production of NGLs from gas processing will peak in 1992, then gradually decline during the rest of the decade. The anticipated decline in NGLs from gas processing has two causes:
- The volume of natural gas available for gas processing will decline for reasons discussed earlier.
- The quality of the natural gas will decline as associated gas, which is relatively rich in NGLS, declines and is replaced by nonassociated gas, which is generally leaner.
U.S. ethane production will gradually increase during the 1990s in response to expanding petrochemical feedstock demand. Improved ethane-recovery levels will more than offset the underlying trend of lower quantities of gas available for processing.
Projected ethane-extraction margins should encourage gas processors to increase ethane-recovery levels during the decade. Total U.S. ethane production will reach about 540,000 b/d by 2000.
Propane production will increase during the 1990s despite the expected decline through most of the decade in propane supplies from gas processing. Refinery propane supplies (including propylene) will increase during the period and surpass gas plants by the end of the 1990s as the largest domestic source of propane supply.
Normal-butane production is expanding rapidly in the first half of the 1990s as a result of the second phase, implemented in 1992, of the EPA's program to reduce summer gasoline Rvp levels.
Refineries are now producing significantly greater quantities of excess normal butane-butylenes during the summer season to meet the lower Rvp specifications. The introduction of reformulated gasoline with even lower Rvp levels in the mid-1990s will further increase refinery normal-butane supplies.
If this were the only shift occurring in the total U.S. butane supply and demand balance, normal-butane markets and prices would be depressed throughout the 1990s. This is not the case, however, as rapid development of butane-based MTBE plants will offset the impact of the Rvp reductions on U.S. butane markets.
Isobutane and natural-gasoline supplies from gas processing will slowly decline during the 1990s due to the same shifts in gas volumes and quality that affect propane and normal-butane recoveries. Additional isobutane supplies via isomerization (not shown in Fig. 3) will be required to meet increasing demand for MTBE plant feedstocks.
NGL OUTLOOK: U.S.
Purvin & Gertz' projection of NGL demand by component is presented in Fig. 4.
Total U.S. demand for NGL will grow through the 1990s at an average overall rate of about 1.6%/year. The actual demand growth will depend, of course, on general economic conditions, the availability of international LPG supplies, and the full impact of environmental legislation on the refining and chemical industries.
ETHYLENE FEEDSTOCK
Most of the U.S. demand for ethane is for ethylene-plant feedstock. Out of slightly more than 500,000 b/d of ethane demand in 1991, about 470,000 b/d were used to produce ethylene.
The chemical demand for ethane declined in the late 1980s as high ethylene and co-product prices and relatively low heavier feedstock (LPG, naphtha, and gas oil) prices favored heavy feedstocks over ethane.
In the early 1990s, the competitive feedstock position of ethane has improved, and ethane demand will continue to increase provided sufficient attractively priced supplies.
By 2000, ethane demand for ethylene-plant feedstock will exceed 500,000 b/d.
MARKETS' GROWTH
Future demand for propane will be influenced primarily by the demand growth in three markets: residential and commercial, chemicals, and engine fuel. All will grow in the 1990s.
Overall, propane demand will grow on average at about 2.5%/year during the decade which equates to about 1.2 million b/d by 2000.
Residential and commercial demand for propane declined in the early to mid-1980s in response to higher energy prices and extension of natural-gas distribution systems.
This trend in propane demand reversed during the second half of the 1980s and, on a weather-adjusted basis, residential and commercial demand for propane has increased since 1985. Demand growth in the residential and commercial sector will average about 1.5% to 2.0%/year during the 1990S.
The demand growth in this sector will be regional with some markets experiencing high growth rates while others stagnate or even decline.
The demand for propane as an olefin-plant feedstock will vary from year to year depending on the availability of attractively priced international supplies from major exporting regions of Africa and the Middle East.
Analysis of the world's propane supply and demand indicates that world supplies will grow faster than base demand in the 1990s. Consequently, the quantity available for price-sensitive markets will increase and the use of propane as olefin-plant feedstock in the U.S. will rise.
The long-term prospects for increased use of propane in the engine-fuel market appear brighter than in recent history. The Clean Air Amendments of 1990 require the introduction of clean fuels and clean-fuel vehicles into several metropolitan areas that currently fail to meet federal clean-air standards.
Most of the demand for clean fuels in markets affected by federal and state environmental legislation will be met with reformulated gasoline.
Propane will play some role in the evolution of clean-fuel markets in the 1990s and will capture additional market share in the engine-fuel market at least to a limited extent.
As a result, propane demand in this end-use sector by the end of the decade will increase by about 30% to 40% over present levels. Additional demand could result if a mandated alternate-fuel program were implemented in the U.S.
MTBE FEEDSTOCK
The most important factor in the future demand for butanes lies in its prospects for use as MTBE-plant feedstock.
Demand for MTBE and other oxygenates will expand rapidly in the 1990s primarily due to the anticipated growth of reformulated gasoline demand in the U.S. and minimum oxygen requirements included in the 1990 Clean Air Amendments.
Phaseout of leaded gasoline progressing in Europe, the Far East, and other world markets should contribute to higher MTBE-demand prospects worldwide.
Responding to the relatively strong outlook for MTBE demand, many companies have announced plans to build new MTBE plants or expand existing ones.
Several new MTBE projects based on refinery isobutylene supplies are in some stage of planning, design, or construction.
Most of the new capacity will be based on the dehydrogenation of isobutane, however, because supplies of isobutylene from refineries and petrochemical operations are insufficient to meet the total market growth for MTBE feedstocks.
The outlook for U.S. MTBE demand is illustrated in Fig. 5. Total demand. for MTBE will increase to about 400,000 b/d in 1995 and approach 500,000 b/d by 2000. Domestic supplies will be the primary source of MTBE with imports exceeding 125,000 b/d by 2000.
Total demand for normal butane will increase in the 1990s, due primarily to increased requirements for isomerization to isobutane to support the growth in MTBE feedstock demand.
Normal-butane consumption as a price-sensitive petrochemical plant feedstock will peak at about 70,000 b/d (annual average) in 1992, then decline abruptly as the demand for normal butane as MTBE-plant feedstock increases rapidly. By 1995, normal-butane cracking will be virtually eliminated.
During the 1990s, the U.S. will move from a butane-long to a butane-short position, and increased imports from Canada and overseas will be required to meet demand.
Demand for isobutane will increase at an average annual rate of about 6.6% during the 1990s. Growth in MTBE feedstock demand is the primary reason for this high growth rate, but refinery demand for isobutane feedstocks will increase, particularly in the second half of the 1990s.
BLENDSTOCK USE
Natural gasoline is utilized in the U.S. as a feedstock in the olefin industry and as a motor-gasoline blendstock or isomerization-unit feedstock in the refining industry.
The supply of natural gasoline will decline somewhat in the 1990s because of trends in natural-gas production and quality. The interaction between the demand for natural gasoline as olefin-plant feedstock and refinery feedstock-blendstock is complex and is likely to shift with developments in both industries.
In the next few years, refinery demand for natural gasoline will moderate somewhat as the lower motor-gasoline summertime Rvp specifications make it more difficult to blend natural gasoline into the motor-gasoline pool in the summer months.
By the mid-1990s, however, demand for natural gasoline as a gasoline blendstock will increase as the addition of relatively large quantities of MTBE increases the overall U.S. gasoline octane pool and makes low-octane blendstocks, such as natural gasoline, more attractive.
INTERNATIONAL LPG
The international LPG industry has expanded rapidly over the last two decades. In general, traditional premium-captive demand for LPG has increased but at a slower pace than total supplies.
As a result, price-sensitive petrochemical feedstock markets have developed to clear the available supplies. Future developments in the international LPG industry will continue to influence the NGL and gas-processing industries in the U.S.
A review of international developments will clarify emerging trends.
SUPPLY GROWTH
World LPG supply will grow from 144 million tons (4.7 million b/d) in 1991 to nearly 200 million tons (6.5 million b/d) in 2000 (Fig. 6).
The largest growth will occur in supplies from the Middle East. In this region, LPG supplies will be related primarily to crude-oil production and will continue to be led by Saudi Arabia.
Resumption of LPG production in Kuwait and the continued build-up in Iran will add significantly to the forecast supply build-up. Iraq will also emerge as a major LPG producer after U.N. sanctions are lifted.
LPG expansion projects in Abu Dhabi and Qatar will contribute further to the Middle East supply forecast.
A doubling of supplies from Africa will accelerate the growing build-up in international LPG availabilities. Algeria will double its production by the mid-1990s, and Nigeria will emerge as an international LPG player in the latter half of the decade.
Significant LPG supply build-ups are projected for Asia, Latin America, and the C.I.S.-Eastern Europe. Most of this production, however, will be absorbed in internal domestic markets and will be unavailable for international commerce. Net supply buildups from North America, Western Europe, and Oceania will be nominal over the forecast period.
Of the major Middle East and African exporters (Fig. 7), Saudi Arabia will continue to be the leader in the international LPG trade. Net export availabilities, however, will decline from Saudi Arabia in the midterm as the start-up of new chemical projects (primarily MTBE plants) absorb more of the domestic production.
The impact of new expansion projects will noticeably improve the international trade position of Algeria and the U.A.E. These exporters will rank as the second and third largest, respectively, at the end of the forecast period.
DEMAND STRENGTHS
On the demand side of the equation, substantial growth is projected for most world LPG end-use applications (Fig. 8).
The premium residential and commercial market currently represents about 47% of total world LPG consumption. This market share will be maintained as growth continues to be strong, particularly in the developing countries of the Far East, Latin America, and the C.I.S.-Eastern Europe.
The next largest end-use market is the chemical sector which accounts for 22% of current total world consumption. This market will be enhanced by significant increases in butane consumption as MTBE feedstock.
Substantial growth in propane use as petrochemical feedstock is also likely as available supplies exceed premium-market demands. This condition will continue to create a need for price-sensitive petrochemical markets, particularly in the U.S., Europe, and the Far East.
All other international end-use markets for LPG will also grow throughout the forecast period. Industrial use will face competition from natural-gas penetration but is still likely to grow, particularly in the developing regions
Environmental pressures will contribute to the increased utilization of LPG as an engine fuel.
By the end of the forecast period, this market will consume about 7% of total demand.
While growing supplies will keep pace with demand buildups, any significant alteration in new supply projects could tighten the global balances. This condition exists today (with the aftermath of the Gulf war) and contributes to the relative firmness in international LPG prices.
This situation will continue in the near to mid-term and bodes well for NGL prices in the U.S.
GAS-PROCESSING ECONOMICS
The gas-processing industry has been profitable so far this decade. Processors have benefitted from strong NGL prices resulting from the Arabian Gulf crisis and weak natural-gas prices caused by excess gas deliverability.
What can the industry expect through the rest of the 1990s?
PERMIAN BELLWETHER
The trends in gas-processing economics in the Permian basin, the largest NGL producing region in the U.S., are indicative of the general profitability of the industry.
The outlook for gas-processing margins in the Permian basin is illustrated in Figs. 9 and 10.
The analysis is based on the average plant characteristics (plant size, inlet-gas composition, recovery efficiency) of all gas plants in the Permian basin. lt assumes the plant produces a mixed NGL stream that is pipelined to Mont Belvieu, near Houston, and that the processor pays the gas producer residue-gas value for the BTUs converted to NGLs and consumed as fuel.
NGL prices at the plant reflect market center pricing less transportation and fractionation fees. Similarly, residue-gas prices have been adjusted to reflect plant location.
For gas processors, the traditional measure of profitability is net processing margin (NGL revenue less operating expenses and the cost of fuel and shrinkage) expressed in cents per gallon. This measure is depicted in Fig. 9 in constant 1992 U.S. dollars.
Gas-processing margins moved up sharply in 1990 as NGL prices reacted to supply uncertainties created by the Arabian Gulf crisis. Margins remained high in 1991 as declining residue-gas prices offset a minor pullback in NGL prices.
Margins will fall back in 1992 and 1993 as NGL prices decline from 1991 levels. After 1993, gas-processing margins will drift slowly downward as residue-gas price increases outpace NGL price gains.
By the end of the decade, processing margins will be roughly one half of 1990-91 margins.
PRODUCER'S ANGLE
The economics of gas processing can also be viewed from a gas producer's perspective.
For a producer, translating margins (cents/gal) into units directly comparable to the value of his primary product (natural gas) may provide a more useful measure of gas-processing economics. This measure is illustrated in Fig. 10.
The bottom section of each bar represents the value of the unprocessed gas stream, while the top section represents net processing margin expressed in $/MMBTU units. This view of gas-processing economics shows the same general trends discussed previously.
Additionally, this perspective shows that processing can significantly enhance the value of a producer's gas production, particularly during periods of relatively low gas prices.
Despite lower margins, gas processing should continue to be profitable for most processors and producers. Margins will stay above the low levels seen in the late 1980s, and gas processing will continue to contribute significant incremental value to a producer's unprocessed gas stream. Although generally profitable, declining net margins will force plant consolidations in some areas, and new grassroots plants will be increasingly difficult to justify.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
