Use of liquefied petroleum gas as petrochemical feedstock will increase worldwide, providing major growth opportunities for LPG producers.
World exports of liquefied petroleum gas will increase more slowly than production as producers choose to use LPG locally as chemical feedstock and export in value added forms such as polyethylene.
So predicts Poten & Partners Inc., New York.
Poten forecasts LPG production in exporting countries will jump to 93 million tons in 2010 from 45 million tons in 1990.
However, local and regional demand will climb to 60 million tons/year from 23 million tons/year during the same period. So supplies available for export will rise to 35 million tons in 2010 from 22 million tons in 1990.
PETROCHEMICAL FEEDSTOCK
Poten said propane will be used largely in the U.S. and Europe in light steamcrackers in competition with ethane and dehydrogenation units to produce propylene. Butane will be used in heavy steamcrackers as an alternative to naphtha and in methyl tertiary butyl ether units.
Increased chemical use of LPG will reflect greater competitiveness as an ethylene feedstock.
Using demand for naphtha steamcrackers in the Far East, where feedstock flexibility is less than in the U.S. or Europe, will cause naphtha prices to rise relative to those of other feedstocks. This in turn will lead to a higher competitive ceiling for LPG as the Far East bids away naphtha and condensate from Mediterranean Europe.
Feedstock demand will be more price sensitive for propane than for butane.
Propane will be long relative to butane.
Propane exports will rise to 21 million tons in 2010 from 13 million tons in 1990, while butane exports grow more slowly to 14 million tons in 2010 from 9 million tons in 1990.
1991-95
Major capacity increases could total about 20 million tons/year of LPG during 1991-95, Poten predicts. However, competitive pressures among producers are likely to limit the rate at which the new capacity is used, reducing supplies available for export.
Iraq's invasion of Kuwait and the Persian Gulf war headed off the LPG surplus Poten had expected in the early 1990s.
The loss in Iraqi and Kuwaiti LPG exports was about 4.5 million tons in 1991. Saudi Arabia and Abu Dhabi made up the supply shortfalls, and supplies were adequate. But there was little slack, as demonstrated by Spot premiums that prevailed throughout 1991.
Poten expects the supply/demand balance to ease progressively in the mid-1990s as Kuwaiti supplies return and new production capacity becomes available in the Middle East and elsewhere.
Qatar's LPG capacity will increase about 400,000 tons/year by 1993 as a result of North field development. Exports will rise with production through 1994 but drop in 1995 as MTBE production starts.
Kuwait's two LPG export plants at Mina Al-Ahmadi have a combined design capacity of 7.2 million tons/year, but crude oil flow will limit LPG production to 3 million tons/year. Exports will resume early this year.
Iran's LPG capacity is likely to increase by about 2 million tons during 1991-95.
Abu Dhabi's capacity will increase about 250,000 tons/year from the Das Island expansion in 1994.
Poten assumes Iraq's Khor al-Zubair export plant, with capacity of 4 million tons/year will be on stream by 1995.
Algeria announced plans to increase production from about 4.3 million tons in 1990 to 7.1 million tons in 1994, then to bring on the 3 million ton/year "Jumbo 2" plant in 1995.
Libya will increase supplies by more than 1 million tons/year by 1994 from refinery upgrades and extraction of LPG from gas liquefaction for LNG trade.
Venezuela plans a capacity increase in excess of 2 million tons/year in 1991-95.
In the North Sea, Sleipner field is scheduled to go on stream, adding about 1 million tons/year to European supplies after 1993.
Kuwait and Iraq will have to regain crude oil markets, and their crude oil flow will limit LPG production.
Algeria's capacity has been under-utilized for some time. Production will increase 1.5 million tons during 199195, or about one fourth of the gain in capacity.
Poten believes total LPG production in exporting regions, excluding the North Sea, will grow by 14 million tons/year during 1991-95.
Consumption in LPG exporting countries will increase by 11 million tons in 1991-95, further reducing the effect of capacity increases on export supplies.
Much of this growth is for petrochemical projects, especially MTBE and ethylene plants in the Middle East. If these petrochemical projects are delayed or use other feedstocks, more LPG will be available for export and prices will be lower.
Consumption for traditional uses in Europe will decline in 1991-95, partly offsetting an increase in Japan.
In addition to the total increase in long haul import demand of 2 million tons, demand in nonexporting countries in exporting regions-Korea and Brazil, for example-will increase by 2.5 million tons/year in 1991-95.
Price sensitive demand in importing countries-Japan, South Korea, Europe, and the U.S.-will increase by more than 5 million tons/year in 1991-95.
1996-2000
New LPG projects in the Middle East and other regions are under discussion for 1996-2000. And more projects to consume LPG are under discussion in importing as well as exporting countries.
Australia is likely to recover LPG from its Northwest Shelf oil and gas fields in the late 1990s, Poten said.
The firm expects rising Saudi Arabian crude oil production to require added gas processing capacity by 2000.
Abu Dhabi plans to increase its LPG production capacity by 1 million tons/year about 1995.
Iran's capacity is likely to increase 2 million tons in 1996-2000. Iraq's Khor al-Zubair production will increase steadily during this period, as will Kuwait's.
Algeria's production will rise and capacity utilization improve after start-up of Jumbo 2.
LPG prices will firm in the late 1990s, as long haul demand in importing countries and local and regional use in exporting regions continue to grow. Local and regional use will increase 10 million tons in 1996-2000, largely offsetting a 14 million ton gain in production.
A 2 million ton/year increase in Saudi production will be entirely offset by a rise in local use of LPG for chemical feedstock.
Mexican consumption will increase by more than I million tons/year in 1996-2000, partly because of an MTBE plant expected to go on stream, reducing exports.
Chemical use of LPG will rise by 2.3 million tons/year in Europe and 1.3 million in the U.S. during this period.
2001-10
The outlook for LPG supply/demand after 2000 becomes increasingly speculative, Poten said.
Prospects are not restricted to currently planned projects or by current policies in producing or consuming countries. The lead time is long enough to build production and consumption infrastructure as needed. Poten expects major new exporters and markets to emerge.
More supplies will come from the Middle East, which will remain the dominant exporting region. In particular, Saudi Arabian crude oil production will rise, which, in combination with expansion of gas processing capacity, will boost LPG production. This will encourage more local use but also will make more LPG available for export.
Poten expects Russia to become a large LPG producer, with exports reaching 1.6 million tons/year by 2010. Russian exports will go to Europe but could find markets in Japan, South Korea, and other Far East countries.
About the turn of the century, chemical demand is likely to approach capacity again, setting off another building cycle, Poten said. Capacity will increasingly be added in countries with local feedstock supply.
Eastern European countries could emerge as major new markets for LPG. Current consumption is very low. The need to clean up the environment will encourage increased natural gas and LPG use, which will be met by imports.
Imports into China are just beginning.
China's southern provinces, reportedly the fastest growing economic region in the Far East, could become large importers. LPG available for export will increase by 5 million tons/year despite a 21 million ton/year increase in production as consumption in exporting regions rises by 16 million tons during 2001-10.
MARKET PRICES
Poten assumes LPG prices will be competitive with key fuels and feedstocks in various markets, but it said no single LPG price is optimal.
A price acceptable to traditional users without fuel switching capability may be too high for price sensitive users, leaving some production unsold. A price acceptable to price sensitive users may be below the level premium users would pay, costing the producer potential revenue.
To garner top dollar, Poten said, producers should first sell all possible LPG to term buyers currently paying government established prices.
The present Samarec formula linking Saudi Arabia's LPG price to its crude oil price makes LPG competitive with other fuels on an fob basis while allowing for some premiums related to LPG-specific market conditions. Any remaining LPG can be sold cif to price sensitive markets.
Two tier pricing can be a viable mechanism if producers do not sell discounted LPG to buyers willing to pay government established prices, Poten said.
Examples of buyers that could buy large volumes on a cif basis-if LPG is priced competitively with alternative fuels and feedstocks-are power plants, utilities, and chemical plants in Japan, Far East, U.S. Gulf Coast, and Europe, importers in Africa and Latin America, and LPG distributors in Europe and the U.S. East Coast.
During 1989 and first half 1990, several buyers signed such contracts with Middle East producers, notably Saudi Arabia. Tight markets spawned in part by the Middle East conflict in the summer of 1990 stopped the sale of discounted LPG-probably until mid-1993, Poten predicted.
As large new supplies come on stream from the North Sea and Africa, new Middle East supplies must be priced for price sensitive markets.
Producers will increase their involvement in shipping and projects consuming LPG in their countries.
Buyers will tend to favor shorter, more flexible LPG contracts. The preferred contract term probably will be 3-5 years.
Traders will find it more difficult to compete and will focus their efforts on transportation.
NETBACKS
Middle East propane netbacks will be highest from sales to Japan and South Korea, Poten said. However, growth of LPG imports by Japan will be moderate.
In the early 1990s, netbacks from Japan will be influenced by relatively high freight rates for the Japanese fleet. Transportation costs to Japan will decline relative to those to Europe and the U.S. in the late 1990s.
LPG values on the U.S. Gulf Coast will get a boost from rising natural gas prices after 1993 and offer higher netbacks than Europe's petrochemical markets. If U.S. gas prices do not rise as expected, netbacks will be lower.
The U.S. East Coast appears to offer the highest netbacks to the Middle East, but that market is seasonal, limited in size, and served by closer suppliers.
Middles East butane netbacks will be highest from sales made to Japan's and South Korea's petrochemical sector on a naphtha related basis.
Japan's power generation and other heat related markets will provide lower butane netbacks than its petrochemical sector because of the premium expected to be attached to naphtha. However, butane sales to Japan's petrochemical plants are likely to be limited because of their preference for heavy feedstocks.
Despite rising petrochemical demand for butane in Europe and the U.S. during the mid and late 1990s, those areas will provide lower netbacks than the heat content valuation used in Japan.
Netbacks to Algeria and the North Sea will remain highest for LPG sales to Northwest Europe. However, after 2000, butane sales from Algeria to the U.S. Gulf Coast will offer higher netbacks than sales to Europe. The seasonal U.S. East Coast heating market for propane offers higher netbacks than Europe's petrochemical sector.
Sales to Japan offer the highest netbacks to Far East exporters for propane and butane.
Mexico and Venezuela gain the highest netbacks from LPG exports to the Caribbean, Latin America, and the U. S.
SENSITIVITIES
One of the lessons taught by history is that oil markets are highly unpredictable. This lesson was reinforced in mid-1990. Many events could upset a long term forecast, Poten said.
In particular, economic growth could be significantly less than assumed, leading to reduced capital for producing and consuming projects and lower demand for energy in general. Energy prices, particularly U.S. natural gas prices, probably would be lower in this scenario.
Alternatively, a collapse in oil prices could lead to renewed economic vigor and a rise in demand for LPG as well as crude oil.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
