ENVIRONMENT AND MARKETPLACE FORCING MAJOR CHANGES IN GAS PROCESSING

R.E. Cannon
Gas Processors Association
Tulsa

Major changes have occurred and internal restructuring is under way that will dramatically change the gas-processing industry.

Some reasons for the industry's current state of flux are dramatic shifts in market demand, the lowest operating margins in recent memory, environmental pressures on NGL uses, increased refinery production of gas liquids, excess capacity and production, and an extremely competitive market place.

PERSPECTIVE

Traditionally, the mainstay of gas-plant profitability has been production and marketing of butanes and natural gasoline, both of which were valued blendstocks in the lucrative and growing gasoline market.

As direct blending stocks, the value of these fractions was linked to the price of finished motor gasoline. The phase-out of leaded gasoline, however, which now accounts for less than 10% of the gasoline pool, has nearly eliminated the blending use of natural gasoline and has effectively transformed the product to that of a commodity feedstock suitable only for further refining or petrochemical processing.

The elimination of the cheap octanes previously afforded by leaded natural gasoline proved to be a short-lived boon for n-butane as refiners sought to replace octanes with blended butane.

Drastic reductions in motor-gasoline volatility, however, first implemented in 1989 and destined to become more severe in the near future, have dumped n-butane into the commodity-feedstock barrel, requiring more expensive and extensive refinery or petrochemical processing.

Thus, these two events have radically reduced both demand and value of butanes and pentanes in the premium motor-gasoline market. Heretofore the most profitable part of the NGL barrel, these fractions have become commodity feedstock, like crude oil, for further processing.

Not only is the refiner not in the summer market for butanes and pentanes, but he is forced to unload his own unwanted butanes and straightrun gasoline into the market. The dismal result is a distressed and unsettled environment that pulls down demand and values for all NGL products.

Propane, originally produced as an incremental product from the old "natural gasoline plant," was first marketed as a premium residential and commercial heating fuel. A burgeoning petrochemical industry stimulated propane recovery in a very short time to become the industry's principal product.

Ethane recovery also began as a second incremental product to meet an insatiable demand for chemical feedstocks. Based on the turboexpander process and the availability of large gas volumes at pipeline straddle plants, ethane production soon equaled that of propane.

This brief review of gas-processing developments indicates that there was a semblance of order in the gas-processing industry of the past: Butanes and pentanes were desirable blend components for motor-gasoline manufacture; propane was a premium heating fuel with excess supplies going into petrochemical feedstocks; and ethane was a prime feedstock for ethylene crackers.

Supply and demand for all products and niche markets were relatively stable and prices were predictable.

THE PRESENT

Over the past 3 years, it has become apparent that the old order has passed and that the gas-processing industry is functioning in a vastly different world.

Table 1, a condensed summary of NGL supply-demand balances for NGL products since 1984, documents continuing reductions in the use of n-butane and pentane in motor gasolines and an increasing trend toward chemical feedstock uses.

Butane in motor gasoline has decreased by about 36,000 b/d since 1984 and is down approximately 60,000 b/d since peak use in 1986. With the assumption that most of the gasoline-volatility reduction occurs over a 6-month period, there is an estimated 100,000 b/d of homeless n-butane during April-September.

Further planned reductions in gasoline vapor pressure likely to orphan another 100,000 b/d of n-butane by the summer of 1992. As noted earlier, this decrease is additionally aggravated by a significant increase in marketed refinery butanes that are backed out of gasoline.

Fortunately or unfortunately, the petrochemical industry has an appetite for cheap butanes and has absorbed much of the excess. Currently, the petrochemical industry is using some 120,000 b/d more than in 1984.

Natural gasoline supply-demand exhibits a similar pattern. About 77,000 b/d of natural gasoline have been backed out of motor gasoline since 1984. About half has been absorbed into petrochemical feedstocks.

The upshot of these shifts may be summarized as follows:

In 1984 approximately 78% of the marketed C4-C5 Supply was consumed in motor gasolines; by 1989, this use had declined to approximately 65% of an essentially equal supply.

Conversely, in 1984, approximately 9% of the marketed C4-C5 supply was used as petrochemical feedstocks. By 1989, approximately 25% of the C4-C5 supply was consumed as petrochemical feedstocks.

Total propane supply-demand is unremarkable, except for a 41% increase in refinery production and a 36% increase in chemical-feedstock demand in 1984-1989.

During that period, refinery-propane production increased from 35 to 45% of total domestic propane production. Coupled with increases in marketed refinery butanes, the refiner-once the gas processor's most cherished customer-is now his principal competitor.

Ethane supply-demand data are also unremarkable, except for the obvious fact that gas processors are at last realizing that much ethane recovery is a losing proposition, and ethane rejection has become more widespread.

The usual ethane rejection procedure also results in an approximate 10% rejection of propane included in the mixed stream. Some of this effect is evident in the decline of NGL propane production in 1989.

For better or worse, gas processing is rigidly linked to the petrochemical industry, which has broad flexibility in its choice of feedstocks. Today, nearly 1 million b/d of liquids, including 430,000 b/d of ethane, flow into chemical feedstock streams-about 42% of total NGL supply. This figure is up from 32% of total supply in 1989.

Gasoline uses for NGL have held at a relatively steady 25% of total NGL supply.

This heavy dependence on the historically cyclical petrochemical industry is ample cause for concern, but the fact is that NGL fortunes are rigidly linked to those of petrochemical.

OUTLOOK

The results of these and other radical changes in the gas-processing industry are shown in Fig. 1.

Based on average wellhead gas prices and average product prices, the current gross margin for ethane is approximately $1.68/bbl, or 4/gal. The propane margin is approximately $3/bbl, butane approximately $6.40/bbl, and pentanes approximately $9.50/bbl.

The gross margin on the composite NGL barrel is approximately $4.57/bbl, or about 11/gal. Operating and maintenance costs for a large, efficient gas-processing plant are, at minimum, about 2/gal; transportation and fractionation costs for product from West Texas or Midcontinent gas-processing plants will run 4-5/gal.

For some smaller, more remote plants, both operation-maintenance and transportation-fractionation costs may prohibit liquid recovery in today's markets.

Further clouding the outlook for gas processing are additional motor-fuel changes that will certainly result from the Clean Air Act of 1990. It is uncertain which fuel or fuels will meet lower emissions criteria, although common sense suggests that reformulated gasoline-not methanol-will be the dominant motor fuel for some time to come.

A nagging question for gas processing, however, is that no one knows what reformulated gasoline will be or what additional refinery fractions will be backed out of gasoline and into the commodity-feedstock stream.

One probability is that demand for such ethers as methyl tertiary butyl ether (MTBE) and ethyl tertiary butyl ether (ETBE) may result in considerable demand for butanes.

There are few processing options available for up-grading gas liquids in the current gas-processing scheme of things. As one example, current cost of a grassroots MTBE unit is $9,000-10,000/bbl of capacity-obviously a major refining investment and an operation not suited to the current gas-processing industry structure.

Production of paraffin isomerates, via fractionation or isomerization, is one viable option for adding value to gas liquids.

One possible benefit of the Clean Air agenda is the recognition of LPG-both propane and butane-as a candidate for clean-burning motor fuels.

With a 50-year history of successful automotive use, LPG is today the most widely used alternate fuel in the world.

The gaseous fuels account for a growing portion of total U.S. petroleum energy production-about 56% in 1989. Moreover, NGLs provide about 22% of total U.S. petroleum-liquids production. Given the continuing decline in crude-oil production capacity and the increasing demand for natural gas, it is certain that gas processing will fill an increasingly important role in meeting energy demands into the foreseeable future.

It is equally clear, however, that the gas processor can no longer rely on the production and sale of NGLs for profitable operations. Gas processing has always been a critical service function in the production of both crude oil and natural gas.

It is becoming increasingly clear that gas processors must reorder their practices to the application of fees for essential services such as gathering, treating, compression, dehydration, and liquids recovery that are necessary to production of usable energy supplies. In addition, it seems certain that the industry will see continuing consolidation of older, under-utilized plants into larger, more efficient operations.