RISING SUPPLY AND PROFITS SEEN FOR U.S. NGL

U.S. supply of natural gas liquids (NGL) will increase but not to flood levels and not at current low prices, says R.F. Webb, owner of R.F. Webb Corp. Ltd., Ottawa.

He predicts gas processors can expect more profitable markets in the next few years, mainly as a result of environmental initiatives in North America and western Europe.

Webb, who spoke at DeWitt & Co. Inc.'s petrochemical review in Houston, said the U.S. supply of ethane will decrease by 2005, but total LPG supplies will have increased by 6.2-7.9 billion gal/year.

The supply increase, he said, can be absorbed in new motor fuel, chemical, and heating markets without a significant drop in LPG prices relative to crude oil and derived petroleum products.

SIGNIFICANT FACTORS

Webb cited these significant factors in future NGL prices and supply:

Rising costs of waterborne liquid petroleum gas (LPG) transporation due to the need to rebuild and expand the LPG fleet after many years of surplus capacity and low returns following a period of large outlays during the late 1970s and early 1980s.
Shift of petrochemical production to the Middle East from consuming countries.
Rising demand for LPG as a fuel in Asia as incomes and environmental concerns grow. Regional growth offers higher netbacks to Middle East producers.
Higher floor prices as producers rely more on storage and reinjection to resist lower prices, which is evidenced by severely reduced Saudi exports to the U.S. The seasonal fall in U.S. butane prices will move refiners to invest in expanded summer storage to meet winter demand, thereby avoiding depressed prices in the summer.
Environmental legislation will increase demand for high hydrogen content fuels and decrease consumption of crude oil and coal.
Interfuel substitution will permit producers to increase netbacks at a time of significant changes in the marketplace, which will favor low carbon content fuels.
Changes in LPG marketing as in, for example, reentry of producers into distribution. Refiners in the U.S. are expected to join the roster of LPG distributors, if only as marketers of propane as automotive fuel.
Tightness of future gas supply in the U.S., aggravated by wider use of gas as a fuel for environmental reasons.
Use of gas as a building block for synthesis of fuels and petrochemicals in gas rich areas lacking pipeline access to major consuming regions.

CHANGING FUNDAMENTALS

Webb said significant forces are changing the U.S. NGL market.

In the refining industry, the gasoline Reid vapor pressure (Rvp) change went into effect last year, lowering butane content in summertime supply. But the full effect on the butane market was masked because the change was in force for only part of the summer.

In addition, there were reduced imports from all major sources but Canada, caused by the falling away of imports for butane and propane from the Middle East and things like loss of production from the Piper Alpha platform in the North Sea.

"We wait to see the full Rvp impact in 1990-particularly in 1992-when the vapor pressure limits will be further reduced and when European LPG production will have returned to normal levels," he said.

In contrast to the increase in LPG supply from refineries, it is only a matter of time before the U.S. supply of gas processing plant LPG and ethane falls, reflecting the higher value of NGL in the gas stream and the trend to leaner gas as the proportion of associated natural gas falls.

The conventional view is that traditional markets for NGL will be essentially flat, while imports and the butane backout will not be matched by increases in new high value applications such as the vehicle carburetion market and cogeneration.

Because markets have to clear, more low priced LPG will be made available to the one remaining market-petrochemical feedstocks.

"This view seriously underestimates the impact that air quality legislation will have on the demand for NGL as fuels in their own right and as intermediates in production of gasoline," he said.