WORLD, U.S. GAS PROCESSING PROSPECTS TO IMPROVE AFTER MID-90S

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

Gas processing, especially in the U.S., will recover from tightening margins during the mid-1990s to remain profitable in the remaining decade and into the next century.

And with new production, particularly in the Middle East and Africa, supplies for international trade will be adequate for the remainder of the decade.

U.S. natural gas-processing economics have improved dramatically from the low processing margins of the late 1980s. That improvement in margins so far this decade has resulted from firmer NGL demand and pricing and--until late 1992--generally weak natural-gas prices.

Purvin & Gertz' current outlook for NGL and natural-gas prices indicates that gas-processing margins will dip somewhat in the mid-1990s as natural gas prices escalate faster than NGL prices, then gradually improve.

Although gas processing will remain profitable through the decade, several structural changes in the industry are currently in progress or appear imminent.

These include the apparent disappearance of the so-called gas bubble, a rapid increase in NGL feedstock requirements for olefin and MTBE (methyl tertiary butyl ether) manufacture, the recent emergence of alterative-fuel legislation, and the current U.S. administration's proposals for additional energy taxes.

If gas prices escalate too quickly, gas-plant profitability will be significantly squeezed. On the other hand, petrochemical-feedstock demand for NGL has been increasing over the last few years. There is some question as to whether NGL supplies will be adequate over the long term and how this possible shortfall could affect NGL pricing.

Moreover, clean air and alternative-fuel legislation appears to improve the prospects for expanded use of propane as engine fuel. But introduction of additional energy taxes is a complex variable that could affect gas processing as well as most other energy-based industries.

INTERNATIONAL LPG

The international LPG industry generally had ample supplies during most of the 1980s. Since the Gulf War, however, growth in world LPG supplies has slowed relative to traditional premium captive demand growth.

This situation has led to tighter LPG supply/demand balances, excess shipping capacity, firmer pricing, and a reduced need to develop price-sensitive markets to clear available supplies.

With the U.S. likely to play a greater role in the international LPG trade, the North American gas-processing industry will be influenced by emerging global trends.

SUPPLY GROWTH

World LPG supplies in 1992 grew to an estimated level of 151 million metric tons/day (mt/d; 4.9 million b/d), a 5% increase from levels of 1991. The improvement is highlighted by record LPG production in Saudi Arabia, renewal of supplies from Kuwait, and build-up of North Sea production.

By 2000, world LPG supplies will increase to nearly 203 million mt/d (6.6 million b/d) (Fig. 1).

The largest increase in LPG supplies will be from the Middle East where today, they are almost totally related to crude-oil production. In the future, however, LPG production from the region will depend more on processing of nonassociated gas and gas-condensate reserves.
Saudi Arabia will continue to dominate LPG production from the Middle East. By 2000, Saudi Arabia will expand its Master Gas System which is currently operating at capacity.
Throughout the forecast period, Iran will likely increase significantly its LPG production with the full commissioning of its Bandar Imam facilities. The prospects for recovery of LPG from nonassociated gas production in Iran will also improve by 2000.
In 1995, Iraq will likely emerge as a major LPG producer and exporter, assuming a resolution of the United Nations' sanctions and the completion of repairs or reconstruction of war-damaged LPG production and export facilities.
Kuwait resumed LPG recovery in 1992 and will reach full production levels consistent with crude oil rates by 1994.
Qatar significantly increased LPG production in 1992 with the commissioning of the first phase of its North field project. The prospects for additional LPG supplies have been enhanced by the probable implementation of an LNG project by early in the next century.
The development of an onshore gas-condensate recycling project and the commissioning of a third train on Das Island will also likely increase significantly LPG production from Abu Dhabi in the mid-1990s.
LPG supplies in Western Europe will increase through the mid-1990s as LPG supplies become available from new gas condensate fields in the North Sea.
Total LPG production in Eastern Europe (including the former Soviet Union) will rebound as the region adjusts to economic restructuring and the introduction of Western capital and technology.
While LPG exports will gradually increase, most of the production increases will be absorbed by growing internal markets.
LPG production in Asia is expanding in the near term with growing refinery production, particularly in South Korea, and increasing supplies from gas processing, specifically in Malaysia.
During the second half of the 1990s, LPG supplies in Oceania will be further enhanced with the development of the Australian Northwest Shelf LPG recovery project.
Latin American LPG supplies will be led by major gas-processing expansions, particularly in Brazil and Venezuela. Increasing production in Argentina and Mexico will also contribute to the growing supplies in the region.
Major production increases from new gas processing projects in Algeria and Nigeria will significantly increase LPG supplies in Africa during the latter half of the 1990s.
LPG supplies from the Middle East and Africa dominate the international trade in LPG. In 1992, exports from these two regions accounted for over 95% of total large volume waterborne movements.

Future international trade will also be influenced by export availabilities from the Middle East and Africa. By the end of the century, waterborne trade from the two regions will increase by nearly 50% (Fig. 2).

While exports from the Middle East will continue to dominate the international LPG trade, Saudi Arabia's role will diminish somewhat, as increasing domestic requirements reduce export availabilities. Throughout the period, the United Arab Emirates (U.A.E.) will emerge as a more significant source of Middle East supplies.

By the end of the 1990s, LPG exports from Africa will increase substantially. The doubling of exports from Algeria and the emergence of Nigeria as a major supplier will result in the region becoming more important to the growing international LPG trade.

MARKETS' DEMANDS

Substantial growth is projected for most world LPG end-use markets (Fig. 3).

Average annual growth in the residential-commercial sector of 3.5% should sustain that sector's current market share of about 46%. This outlook is supported by continuing strong demand in the developing countries of the Far East, Latin America, and Eastern Europe including the former Soviet Union.

Residential-commercial growth in North America, Western Europe, and Japan will moderate to reflect the maturity of these markets.

The petrochemical sector currently accounts for about 23% of total world consumption. Growth in this end-use sector will be substantial and will be dominated by increased butane use as MTBE feedstock.

Continued growth in propane use as olefin-plant feedstock will also contribute to base petrochemical demand for LPG in most regions of the world. This is particularly true for the former Soviet Union where the availability of LPG feedstocks to the petrochemical industry will be enhanced with the completion of the Trans-Urals pipeline in the latter half of the 1990s.

The expectation that future world LPG supplies will exceed premium market demand makes clear a continuing need to develop price-sensitive markets (especially for propane). This condition will contribute to additional growth of LPG use in the petrochemical sector, particularly in the U.S. and Europe.

The Far East and Middle East will also participate in the clearing of available world LPG supplies in the soon-to-be-completed new olefin plants with LPG feedstock flexibility. By 2000, use of LPG in the petrochemical sector will increase to a market share of about 28%.

With the exception of the engine-fuel market, most all other world end-use markets for LPG will grow at lower rates than for the residential-commercial and petrochemical sectors.

Increasing environmental pressures and clean-air initiatives will enhance the growth prospects for LPG as engine fuel. Engine-fuel growth in any particular region will, however, be directly influenced by governmental tax incentives and mandates.

Refinery use of LPG (primarily butane) will be affected by future specifications for motor gasoline. Generally, lower vapor-pressure specifications tend to reduce the refiner's use of normal butane.

This reduction is offset somewhat by an expected increase in isobutane consumption as feedstock for alkylation and for internal production of MTBE. Overall, the market share for refinery use of LPG will decline slightly over the forecast period.

The greatest decline in LPG market share will occur for the industrial sector. Increasing competition from natural gas continues to penetrate this market sector, although growth in industrial LPG use remains likely for some developing countries in the world.

While projected supplies will keep pace with demand build-ups, any significant delays or cancellations of anticipated new supply projects could aggravate the current global tightness in LPG supply, particularly for butane.

This development could accelerate a growing trend of substituting propane for butane in LPG-mix applications, as well as promote the use of alternative fuels in some Far East industrial LPG markets.

U.S. OUTLOOK

Currently, the U.S. natural gas industry appears to be in transition. The so-called gas bubble seems finally to have burst, and gas is moving from being in oversupply (excess deliverability) to nearly balanced or possibly even tight.

Natural-gas demand continues to grow while U.S. drilling activity remains depressed. While the U.S. has a relatively large potential gas reserve base available for development, there is some concern that natural-gas market prices will be insufficient to stimulate new drilling activity fast enough fully to keep pace with demand growth.

If this occurs, natural-gas demand could be supply constrained by the second half of the 1990s.

The current outlook for natural-gas prices and import levels suggests that natural-gas supplies will continue to increase through the 1990s, slowing toward the end of the decade as deliverability constrains the development of some gas markets.

Total Lower 48 natural gas supplies (including imports and nonconventional gas) will increase from about 19.7 tcf in 1992 to about 21.8 tcf in 2000.

This view appears to agree generally with the recently completed National Petroleum Council study on the potential for natural gas supplies. 1

Conventional Lower 48 dry-gas production will increase from about 17.2 tcf in 1992 to about 17.9 tcf in 2000. Associated natural-gas production will decline during this period as crude-oil production in the Lower 48 continues to fall.

Nonassociated natural-gas production rates will increase, more than offsetting the drop in associated-gas production.

Reduction in associated-gas volume is particularly significant to gas processing because associated gas is typically rich gas which results in considerably higher NGL production rates per unit of gas volume compared to nonassociated gas.

This reduction will tend to moderate somewhat the impact of increasing natural gas production rates on NGL supplies (particularly butane and natural gasoline).

U.S. NGL SUPPLIES

In the U.S., NGL is produced from two sources: It is extracted from natural gas in gas-processing plants and produced from crude oil in refineries. Future NGL supply levels depend therefore on many complex variables that affect the natural gas, gas processing, and refining industries.

Fig. 4 presents Purvin & Gertz' outlook for U.S. NGL supplies.

Total NGL supplies have increased significantly in the last several years. NGL production from gas processing has increased since 1990 primarily because of substantial improvements in gas processing margins since the late 1980s.

Refinery production of NGL (primarily propane and butane) has also increased because of increased conversion levels and reduced gasoline summertime volatility levels.

In total, NGL supplies increased approximately 12% from 2.1 million b/d in 1990 to about 2.3 million b/d in 1992. U.S. NGL production should continue to rise over the next several years, peak at about 2.4 million b/d around 1996, then gradually decline as NGL production from gas processing moderates.

ETHANE, PROPANE PROSPECTS

U.S. ethane production has increased noticeably in recent years due primarily to a dramatic improvement in ethane-extraction economics.

Ethane extraction has generally been very profitable in the 1990s, compared with the marginal or unprofitable economics that existed in the late 1980s.

As a result, ethane production increased from about 490,000 b/d in 1990 to around 570,000 b/d in 1992.

Ethane supplies will continue to expand during the rest of the 1990s, as overall ethane-recovery levels gradually increase. Anticipated ethane extraction margins should be high enough to encourage many gas processors to enhance ethane recovery.

Also contributing to the projected increase in ethane supplies through the mid-1990s is a gradual increase in natural-gas volumes available for processing.

U.S. propane production increased from about 920,000 b/d in 1990 to 1.2 million b/d in 1992. The rise in propane supplies resulted from increased extraction from natural gas as well as increased production from refineries.

Increased propane supplies from U.S. gas processing resulted from significant improvement in gas-processing economics and the resulting increase in gas processed. Refinery conversion levels have been steadily increasing in recent years, contributing to the growth in refinery-propane supplies.

Total U.S. propane production will continue to expand during the 1990s. Supplies from natural-gas processing will continue to rise through the mid-1990s and then slightly decline late in the decade.

The slow decline will result from a relatively flat outlook for natural-gas volumes available for processing and a general decline in the average gas quality.

Refinery-propane production will continue to increase during the 1990s. With current U.S. clean-air legislation, most companies are in the process of modifying refinery configurations to meet more stringent product specifications.

As a result, most refineries will undergo complex changes that will alter propane production levels. While some of these changes, such as reduced reforming severity, will tend to reduce LPG production, other changes will offset this yield shift.

Overall, refinery-propane production will increase, but many uncertainties regarding refinery configuration changes remain.

BUTANE'S FORTUNES

Normal-butane supplies in the U.S. have increased in the last several years primarily because of reductions in summertime gasoline's volatility specifications. Refiners were forced to back out significant quantities of butane from gasoline blends during the summer months.

As a result, most high-conversion refineries are oversupplied in butane during the summer period. Normal-butane supplies increased from about 270,000 b/d in 1990 to about 320,000 b/d in 1992. Supplies from gas processing increased somewhat during the period, but most of the change resulted from the impact of lower gasoline volatility on refinery supplies.

Normal-butane supplies will increase through 1995 and then remain relatively flat during the rest of the forecast period.

Isobutane and natural-gasoline supplies have increased since 1990 because of increased gas-processing activity. Supplies of isobutane and natural gasoline will continue to rise through the mid-1990s, then gradually decline due to the same shifts in gas volumes and quality that affect propane recovery.

Additional isobutane supplies via isomerization (not shown in Fig. 4) will be required to meet increasing demand.

U.S. NGL DEMAND

Purvin & Gertz' projection of U.S. NGL demand by component is presented in Fig. 5.

Total U.S. demand for NGL increased from about 2.2 million b/d in 1990 to about 2.4 million b/d in 1992. Many factors contributed to the increase in demand, but the rise in domestic NGL supplies was probably the most significant factor.

Imports were down somewhat during the period, and NGL demand would have probably been even higher in 1992 had imports not declined from earlier levels.

ETHANE, PROPANE OUTLOOK

Most of the U.S. demand for ethane is for ethylene manufacture. In 1992, total U.S. ethane demand was approximately 570,000 b/d. Ethane demand for ethylene plant feedstock was nearly 560,000 b/d.

The total U.S. demand for ethane has increased significantly since 1990 with the addition of new NGL-based ethylene plant capacity and the expansion of domestic ethane supplies. Unlike the late 1980s, when competitive ethylene feedstock economics favored heavier feedstock (LPG, naphtha, and gas oil) over ethane, ethane is a very competitive feedstock, and demand will increase as additional supplies become available.

U.S. ethane demand will increase to 630-640,000 b/d by 2000, as domestic supplies gradually expand and Canadian imports increase. Demand would increase even further if the full potential of Canadian imports could be realized.

Future demand for propane in the U.S. will be influenced primarily by growth in three end-use sectors: residential-commercial, petrochemical, and engine fuel. Demand will grow in all of these sectors during the forecast period.

Propane demand grew from about 920,000 b/d in 1990 to slightly more than 1 million b/d in 1992. Most of the growth occurred in the residential-commercial and petrochemical sectors. In addition, agricultural demand for propane increased sharply in 1992 because of a particularly strong crop-drying season.

On a weather-adjusted basis, residential-commercial demand has generally increased since the mid-1980s. Propane demand growth in this sector continues to be regional with some markets experiencing relatively strong growth while others appear stagnant or in decline.

Overall, residential-commercial demand for propane in the U.S. will grow at moderate rates through the rest of the 1990s. Demand growth in this sector will average 1.5-2% during the forecast period.

The demand for propane in petrochemicals is more variable than for most other end-uses because of the highly competitive nature of the petrochemical industry and the feedstock flexibility of many crackers.

Propane cracking rates are significantly altered in flexible olefin plants as feedstock cracking economics shift with changes in supply, demand, and pricing of feedstocks and ethylene co-products. As a result, about 20-40% of propane demand in petrochemicals is price-sensitive and can vary as feedstock economics change.

During the 1990s, international supplies of propane will expand faster than base demand. As a result, the availability of international propane supplies for price-sensitive petrochemical feedstock applications in the U.S. and other key world markets will increase.

Expanding international propane supplies, as noted earlier, coupled with continued growth in domestic supplies, should lead to an increase in the use of propane during the rest of the decade.

Engine-fuel demand for propane has declined from levels observed in the mid-1980s and is currently believed to be relatively flat. With recent clean fuels and alternative-fuels legislation, however, U.S. prospects for increased engine-fuel demand for propane appear brighter in the 1990s.

Most of the demand for clean fuels effected by federal and state legislation will be met with reformulated gasoline. Alternative clean fuels (LPG, CNG, and methanol) will play a role in a portion of the transportation-fuels market, particularly in fleet applications.

As a result, engine-fuel demand for propane will grow significantly in the 1990s or early in the following decade.

BUTANE AND FUEL CHANGES

The most important factors influencing butane demand in the 1990s are gasoline volatility changes and rapid development of MTBE production capacity. The summertime gasoline Rvp specifications were reduced in the late 1980s and early 1990s, with the most recent change occurring in 1992.

As a result, refineries had to reduce the quantity of n-butane included in summertime gasoline blends, and most high-conversion refineries now have excess butane during summer months.

Refinery demand for n-butane has declined significantly since the 1990s, and many refiners are now storing or selling excess supplies during summer months. As a result of this supply/demand shift, a price-sensitive market for n-butane has developed for use as a seasonal feedstock in flexible olefin plants.

The total U.S. demand for n-butane has declined significantly since the 1980s primarily because of gasoline Rvp reduction. During the early 1990s, demand for n-butane (excluding isomerization feedstock demand) appears to have increased slightly.

Over the longer term, however, n-butane will decline as gasoline Rvp levels are further reduced in the mid-1990s and butane cracking in olefin plants is discontinued. Normal butane cracking in the U.S. will be virtually eliminated by 1995 or 1996, as increasing quantities of butane imports must meet the growing demand for MTBE-plant feedstock.

The demand for MTBE is expanding rapidly primarily because of the growth of reformulated gasoline in the U.S. and the minimum oxygen requirements included in the 1990 Clean Air Act Amendments.

Growth in gasoline-demand requirements in other world markets (such as the Far East) and continuation of the phase-out of leaded gasoline is also making some contributions to MTBE demand growth.

Many companies have decided to build new MTBE plants or expand existing ones to meet the rising demand for MTBE. Several new MTBE projects based on refinery isobutylene supplies have been or are in the process of being added.

Supplies of refinery-produced isobutylene are limited, however, forcing many companies to elect to build MTBE plants based on the dehydrogenation of isobutane. The addition of new butane-based MTBE plants is leading to a dramatic increase in the demand for isobutane and the need to expand isomerization capacity.

The total U.S. demand for isobutane will grow by an average of about 7%/year during the 1990s and reach about 380,000 b/d by the end of the decade. Most of the growth derives from expansion of MTBE-feedstock requirements, but refinery demand for isobutane will also increase during the second half of the decade.

NATURAL GASOLINE

Natural gasoline is utilized in both the U.S. petrochemical and refining industries. It can be cracked in any olefin plant with naphtha-cracking flexibility.

Refineries can directly blend natural gasoline into motor gasoline or use it as feedstock for isomerization units and blend the isomerate into motor gasoline.

Historically, refinery applications have accounted for about 70-80% of the total U.S. demand for natural gasoline. Total natural gasoline demand has increased somewhat since 1990 in response to increased domestic supplies from gas processing and higher import levels.

In general, natural gasoline demand will follow supply trends. As more supplies become available, additional gasoline blending can occur (particularly in winter months) and natural gasoline can replace alternate olefin-plant feedstocks.

Conversely, if natural-gasoline supplies decline, refiners can readjust gasoline blends and olefin manufacturers can utilize alternate feedstocks.

Natural-gasoline demand will increase in the short-to-medium term as domestic supplies from gas processing continue to rise. Demand will gradually decline after 1996, as natural-gasoline production from gas-processing peaks and begins to decline.

GAS-PROCESSING ECONOMICS

Many changes have occurred in the gas-processing industry since the mid-1980s. Gas-plant profitability declined sharply in the late 1980s in part as a result of weakness in NGL markets and prices.

During the period, ethylene-cracking economics favored heavier feedstocks (naphtha, condensate, and gas oil) over ethane and pushed ethane and propane prices downward. Butane prices declined sharply in the late 1980s because of an effect of gasoline Rvp reductions on supply and demand.

Since mid-1990, gas-processing economics have recovered sharply and are at relatively high levels of profitability.

Gas-processing economics vary significantly from plant to plant depending on location, the quantity and quality of natural gas being processed, and many other factors, including contractual terms between the processor and producer.

The trends in gas processing in West Texas' Permian basin (the largest region in the U.S.) indicate the general profitability of the industry.

The outlook for gas-processing margins in the Permian basin appears in Fig. 6. The margin analysis is based on the average plant characteristics (capacity, inlet-gas composition, recovery efficiency) of all gas plants in the Permian basin.

The plant is assumed to produce a mixed NGL stream that is transported to Mont Belvieu, Tex., for fractionation and storage. The gas processor is assumed to pay the gas producer residue-gas value for the BTUs recovered as NGL and consumed as fuel. NGL prices at the plant reflect U.S. Gulf Coast pricing less transportation and fractionation costs.

As discussed, gas-processing margins have increased sharply since mid-1990. The Permian basin net processing margin (Fig. 6) illustrates this trend.

Plant margins have moderated slightly from 1990-91 levels but are still relatively strong on average. The current outlook for NGL and natural-gas prices indicates margins will be squeezed slightly over the next few years, as natural-gas prices escalate faster than NGL prices on average.

Throughout the 1990s, gas processing appears to remain profitable. It should be noted, however, that several structural changes are occurring in the natural gas and gas processing industries, and these developments may affect future margins.