CLEAN-AIR LEGISLATION WILL BUOY U.S. GAS PROCESSING

Rick R. Haun, E. E. Ellington, Ken W. Otto
Purvin & Gertz Inc.
Dallas

The effects of recent U.S. clean-air legislation on NGL demand and pricing will sustain future gas-processing economics at attractive levels. This will remain true despite a projected decline from the recent surge in gas-plant profitability.

Demand for all NGL products will be firm throughout the 1990s. Increased requirements for butane as methyl tertiary butyl ether (MTBE) feedstock will strengthen butane prices. Higher base-load requirements for propane in new NGL-based olefin plants will also have a positive impact on propane prices.

Pending alternative-fuels legislation could further add to the demand and price firmness for propane.

The demand for ethane will remain relatively strong to meet the feedstock requirements for new and existing ethane-based olefin plants with limited feedstock flexibility.

An increasing demand for natural gasoline as a motor-gasoline blendstock will also contribute to a price strengthening relative to motor gasoline.

U.S. GAS SUPPLY

Future U.S. Lower 48 natural-gas production will be adversely affected by chronically low wellhead prices and the resulting low level of drilling activity.

In the short term, the effects will be minimal and masked by increasing production resulting from efforts to market surplus production. In the longer term, after 1995, domestic conventional gas supplies will be insufficient to satisfy all existing and proposed markets.

The shortfall will be supplied by imports and coalseam gas. Canadian imports are expected to reach a level of about 2.5 tcf in 2000. In addition, LNG will account for almost 0.5 tcf in 2000. Coalseam gas could reach a level of almost 1.0 tcf- The total Lower 48 gas supply available for processing ("marketed production") was about 18.0 tcf in 1990. Marketed production will remain in the range of 18.0-17.6 tcf through 1995, then begin a gradual decline to about 16.2 tcf in the year 2000 (Fig. 1).

The volume of gas processed in the Lower 48 in 1990 will be about 13.6 tcf, 75.5% of marketed production. Under an assumption of no dramatic collapse in NGL prices, this approximate level should be sustained through about 1995.

After 1995, the volume of gas processed will decline at a slightly greater rate than that for marketed production. The greater rate of decline will result from a decreasing percentage of rich associated gas.

Associated gas was approximately 18.2% of Lower 48 gross withdrawals in 1990. In 2000, associated gas will be about 17% of gross withdrawals. In addition to decreasing the volume of gas processed, the leaner composition will also affect the recovery of NGLS, as described later.

NGL SUPPLY

This outlook for natural-gas production will affect domestic and Canadian ethane and LPG production from gas processing.

In the U.S., ethane, propane, and butane production will peak in the mid-1990s and decline thereafter. A gradual reduction in natural-gas quality throughout the forecast period will reduce the percentage of natural gas processed and accelerate the decline in ethane and LPG production.

For ethane and propane, improved recovery levels will partially offset the underlying trend of reduced gas-processing volumes. Greater declines in butane production are expected because maximum recovery levels are already being achieved.

Purvin & Gertz' outlook for gas-plant LPG supplies is presented in Table 1.

Refinery supplies of LPG have increased in the recent past because of higher conversion capacity utilization and the impact of vapor-pressure reduction in gasoline. With the recently enacted clean-air legislation, most U.S. refining configurations will change to comply with the government mandates.

Each refiner will make appropriate refinery modifications to suit its specific needs and market niche. It is generally believed that reforming severity will be reduced to minimize aromatics production and that catalytic-cracker selectivity will be shifted towards more olefin production for subsequent conversion to alkylate or ethers.

While reduced reformer severity will result in a decline in refinery LPG production, the changes in catalytic-cracker operation, gasoline blending, and crude runs will more than offset the reduction, and overall refinery LPG production will increase (Table 1).

Developments in catalyst technology will have a major influence on the precise internal LPG-production levels. Overall, the expected increase in refinery LPG production will offset, for the most part, the forecast decline in supplies from gas processing.

U.S. domestic production of LPG will therefore remain relatively constant throughout the forecast period.

NGL DEMAND

Purvin & Gertz' projection of LPG demand by component is shown in Table 2. A summary of the demand outlook for each LPG product, ethane, and natural gasoline follows.

MTBE, BUTANE

The demand for MTBE and other oxygenates will expand rapidly in the 1990s primarily because of the anticipated growth of reformulated gasoline demand in the U.S. and minimum oxygen requirements included in the recent Clean Air Act amendments.

The phaseout of leaded gasoline is progressing in Europe, the Far East, and other world markets, and should contribute to higher MTBE demand worldwide.

In response to relatively strong MTBE demand, at least 70 serious MTBE projects are in some stage of planning, design, or construction. Many of these projects are based on refinery or petrochemical co-product isobutylene, but these supplies are insufficient to meet anticipated demand.

Several catalyst companies are developing new fluid catalytic cracker (FCC) catalysts designed to maximize the production of isobutylene and isoamylene (for tertiary amyl ether-TAME-manufacture).

Even with these potential improvements in isobutylene supply, it appears that a large portion of the new MTBE capacity will be based on the more costly route of dehydrogenation of isobutane to produce the required isobutylene feedstock.

The potential MTBE-demand growth prospects in the U.S. are strong but depend heavily upon the developments in reformulated gasoline and federal and state clean-air legislation in upcoming years.

During the past 2 years, reformulated gasoline has moved from relative obscurity to the forefront of efforts to reduce automotive emissions in the U.S. Reformulated gasoline will be the predominant clean fuel in the 1990s, but LPG, methanol, or compressed natural gas will probably be used in selected applications in metropolitan areas with severe or extreme air-quality problems.

Oxygenated fuels will gain gasoline market share rapidly in the 1990s as states move to comply with the 1990 Clean Air Act Amendments and, in some cases, enact their own legislations in efforts to reduce automobile emissions.

MTBE will be the primary oxygenate in the U.S. but other oxygenates including ethanol, TAME, and ethyl tertiary butyl ether (ETBE) will make some contributions to the overall oxygenate supply. The overall outlook for U.S. MTBE supply, demand, and imports is shown in Fig. 2.

While domestic production of MTBE will increase significantly in the early to mid-1990s, it appears likely that increased imports will be required to meet demand.

The increased utilization of butane as a feedstock for MTBE manufacture will have a dramatic impact on North American and international butane supply/demand balances in the 1990s.

A seasonal surplus of butane developed in North America in recent years following the 1989 implementation of Phase 1 of the EPA's program to reduce summer motor-gasoline Rvp levels.

Phase 2 of this program, scheduled to be implemented in 1992, will intensify the seasonal supply/demand imbalance at least in the short term.

By the mid-1990s, however, increased demand for butane as an MTBE-plant feedstock should tighten the supply/demand balance, and North America will resume its historical position as a butane-importing region.

As a result of this shift in supply/demand patterns, butane prices will increase during the mid-1990s and butane cracking in olefin plants will be discontinued in North America.

Refinery demand for butane will gradually rise after 1992 as a result of increasing demand for isobutane as an alkylation-plant feedstock.

PROPANE

Future demand for propane in the U.S. will be influenced by the outlook for growth in three end-use sectors: retail (primarily residential-commercial), engine fuel, and chemicals.

A low-to-moderate growth rate is forecast for the residential-commercial sector for space heating, cooking, and hot-water heating applications. The growth is regional and depends upon the extent of existing and future natural-gas penetration, the outlook for electricity pricing, economic activity, and weather.

Overall, U.S. growth rates for the residential-commercial sector will be in the 0.5% to 1.5%/year range throughout the forecast period. On a regional basis, however, growth rates in the 5%/year range have been achieved in areas remote from natural-gas mains.

The prospects for increased use of propane could be significantly enhanced with the implementation of a mandated alternative-fuels program in the U.S.

Today, the domestic engine-fuel market comprises about 5% of the total U.S. propane demand. On a worldwide basis, the engine-fuel market consists of about 7% of total world LPG (propane and butane) demand.

With proper mandates, tax incentives, or both, a significant increase in propane use as engine fuel would be expected. Current consumption levels could easily double or triple by the end of this decade or early in the next century, particularly in fleet vehicles. This development would reduce the propane availabilities for petrochemical feedstock.

Notwithstanding the prospects for engine-fuel growth, propane consumption in the U.S. will continue to grow as a base-load feedstock for new NGL-based olefin plants (that is, Quantum and Phillips) and as a price-sensitive feedstock.

The availability of price-sensitive propane feedstocks will be enhanced by the expected continuing imbalance in international supplies relative to premium demand.

ETHANE

During the second half of the 1980s, ethane was generally a disadvantaged olefin-plant feedstock in flexible naphtha/gas-oil crackers. This resulted because feedstock prices declined more rapidly and severely than ethylene and co-product (propylene, benzene, etc.) prices following the crude-oil price collapse of 1986.

This trend favored ethylene production from heavier feedstocks, such as naphtha, condensate, and gas oil, and led to a decline in ethane demand.

Chemical demand for ethane has rebounded during the past year because, in part, of the effect of the recent Middle East conflict on competitive feedstock pricing and olefin-plant economics.

While this impact is considered temporary, it appears that there may be some prospects for improving ethane demand and strengthening prices in the future.

Most of the current ethylene expansions are based on NGL feedstocks. These plants and the new ethane-based cracker being built at Lake Charles, La., by Westlake Polymers should provide a significant increase in base demand for ethane.

Over the longer term, chemical demand for ethane, coupled with the anticipated decline in domestic natural-gas production, could lead to higher ethane recovery levels in gas-processing plants, as required to balance ethane demand, and a general strengthening in pricing.

NATURAL GASOLINE

Natural gasoline is utilized in both the U.S. petrochemical and refining industries. Natural gasoline can be cracked in any olefin plant with naphtha cracking flexibility, directly blended into motor gasoline by refineries, or isomerized in refineries and subsequently blended into motor gasoline.

The supply of natural gasoline will decline somewhat in the 1990s because of expected trends in natural-gas production and quality. The interaction between chemical feedstock and refinery demand is complex, and future demand levels will depend on competitive olefin-plant feedstock economics and the blending value of natural gasoline in the motor-gasoline pool.

One development that could significantly affect the demand and pricing of natural gasoline in the 1990s is the effect of mandated oxygenate levels in the U.S. gasoline-octane balance. With the projected MTBE blending requirements, it appears that the U.S. refining industry could become significantly long on gasoline octane.

If this occurs, demand for natural gasoline as a motor-gasoline blendstock would likely increase and pricing would be expected to strengthen relative to motor gasoline.

INTERNATIONAL LPG

The U.S. natural-gas processing industry will continue to be influenced by developments in the international LPG industry. A review of the outlook for the international marketplace and its relationship to probable developments in the U.S. market is required in order to have a full understanding of the future economics of U.S. gas processing.

World LPG supply will grow from 127 million tons (4.1 million b/d) in 1990 to 168 million tons (5.4 million b/d) in 2000.

The most significant events affecting the short-to-medium term are the availabilities from the Middle East. The aftermath of the Gulf war and the timing for repairs and reconstruction of LPG production facilities in Kuwait and Iraq (as well as resumption of LPG exports from Iran) will affect current Middle East availabilities.

As shown in Fig. 3, exports from Kuwait will resume by mid-1992 and supplement the re-emergence in 1991 of Iran as an international LPG exporter.

Although highly speculative, exports from Iraq could commence in 1994. Future longer-term LPG exports from the Middle East depend upon the levels of crude-oil production, which in turn depend upon the level of future world economic activity.

Although the Middle East will remain the dominant international LPG export location, increased production from Algeria and Canada will contribute to renewed availabilities in the latter half of the 1990s (Fig. 4).

While world premium-captive demand for propane will grow at slightly less than 2.5%/year through 2000, world propane supplies are projected to exceed this underlying base demand growth (Fig. 5).

Accordingly, the continuing excess world propane-supply outlook will require further development of price-sensitive, olefin-plant feedstock markets.

The precise development of this market will be influenced by, and may face competition from, an emerging engine-fuel market in the U.S.

The supply/demand outlook for world butane is different from that for propane. With the emergence of increased butane demand as MTBE feedstock, the growth in world premium-captive demand for butane is projected at slightly greater than 3%/year throughout the forecast period.

With world butane supplies expected to grow at a slower rate than premium demand, a contraction in the underlying base surplus is expected (Fig. 6). This will result in a reduction in the need to develop price-sensitive butane feedstock markets, particularly after 1995.

This outlook for international LPG supply and demand will contribute to a significant firming of U.S. and international butane prices.

Also, while there will be a continuing need to develop price-sensitive propane markets, the increase in U.S. propane demand in NGL-based olefin plants (and possibly the engine-fuel market) coupled with reduced availabilities of price-sensitive butane supplies will result in improved propane price levels.

These developments will have a positive effect on U.S. gas-processing economics.

GAS-PROCESSING ECONOMICS

Purvin & Gertz routinely calculates the profitability (NGL revenue less fuel and shrinkage costs and operating expenses) of a hypothetical 50-MMcfd expander plant in West Texas.

This plant operates at capacity and processes a medium-quality gas stream (that is, inlet composition of about 3 gal of ethane and heavier NGL per Mcf of inlet gas).

All NGL recovered from the gas is pipelined as a mix to Mont Belvieu for fractionation. The plant receives the Mont Belvieu spot price for each component less a transportation and fractionation fee.

The gas-plant operator receives all revenues from the sale of NGL and pays the producer for fuel and shrinkage at residue-gas value (equal to West Texas spot natural-gas price).

The gas plant operator must also cover plant operating expenses. The plant has ethane-rejection capabilities.

The economics of the reference plant since 1987 are presented in Fig. 7.

As shown, the profitability was relatively good in 1987, but lower NGL prices and higher fuel and shrinkage costs in 1988 and 1989 caused profitability to decline significantly. The plant profitability in 1988 and 1989 was roughly one third of the level in 1987.

Also shown, the impact of the Persian Gulf War and low natural-gas prices had a significant and positive effect on the profitability of the reference expander plant in 1990. The profitability in 1990 was nearly double the level experienced in 1987.

With a return to more stable pricing trends for NGLS, the profitability of the reference plant will slowly decline through the early 1990s.

Thereafter, expander-plant profitability will continue increasing in concert with the improving outlook for NGLS, as compared to natural-gas prices which will increase at slightly lower rates in the long term.

In the short term, gas prices will rebound somewhat from the current depressed levels.

Overall, the incentives for ethane extraction by gas processing will improve. This will improve ethane and propane recovery levels for the reference gas-processing plant. The economics of gas processing at other locations will be influenced by the extent of any additional transportation fees.