Global gas processing will strengthen to meet expanding markets

Rick R. Haun
Purvin & Gertz Inc.
Dallas

Ken W. Otto, S. Craig Whitley, Ronald L. Gist
Purvin & Gertz Inc.
Houston

The worldwide LPG industry continues to expand faster than the petroleum industry-4%/year for LPG vs. 2%/year for petroleum in 1995 and less than 1%/year in the early 1990s.

This rapid expansion of LPG markets is occurring in virtually every region of the world, including such developing countries as China.

The Far East is the focus of much of the LPG industry's attention, but many opportunities exist in other regions such as the Indian subcontinent, Southeast Asia, and Latin America.

The investment climate is improving in all phases of downstream LPG marketing, including terminaling, storage, and wholesale and retail distribution.

The world LPG supply/demand balance has been relatively tight since the Gulf War and should remain so. Base demand (the portion of demand that is not highly price-sensitive) is expanding more rapidly than supplies.

As a result, the proportion of total LPG supplies available for price-sensitive petrochemical feedstock markets is declining, at least in the short term.

Importers; price patterns

Purvin & Gertz Inc. believes that the Far East will retain its position as the dominant LPG importing region in the world. Japan should remain the largest single importer, but growth in South Korea and China will further expand and diversify the LPG markets in the region.

Overall net LPG imports to Asia should continue to expand through 2005 as demand growth continues to outpace regional supply build-up. Far East LPG imports will grow from 22.2 million metric tons per year (mty) in 1995 to 29.2 million mty in 2005.

The Middle East will continue to dominate LPG exports during 1996 through 2005. Domestic demand in several Middle East countries is growing rapidly, but supplies should expand faster than demand.

The development of several LPG-based petrochemical projects has restrained growth in exports from Saudi Arabia.

In North America, strong growth in the petrochemicals feedstock market has resulted in rising demand for NGL. The surge in olefin demand experienced in 1994 and 1995 led to a noticeable expansion in total feedstock requirements.

Additionally, capacity expansions of several existing ethylene plants and construction of several new grassroots plants were announced during 1995. These ethylene capacity additions will come on stream between 1996 and 2000.

This feedstock growth, combined with a reasonably flat outlook for regional NGL supplies in North America, should cause further tightening in regional NGL supply and demand, particularly for ethane and propane.

Additionally, the U.S. market will be faced with expansions in the NGL transportation, fractionation, and storage infrastructure to handle future NGL demand requirements.

World LPG demand

Globally, the balance between LPG supply and demand is tight. About 94% of total world demand for LPG occurs in end-use markets that are relatively insensitive to fluctuations in price. Examples of end uses that Purvin & Gertz classifies as "base demand" include residential and commercial, industrial, engine fuel, town gas, and a portion of petrochemical demand.

World demand for LPG increased from about 129 million mty in 1990 to an estimated 159 million metric tons in 1995. This increase represents an average growth rate of 4.2%/year since 1990.

Markets for LPG have expanded in all end use sectors during this period.

Residential, commercial

Growth has been particularly strong, however, in residential-commercial and petrochemical sectors. Demand for LPG will continue to be strong in these applications; world LPG demand growth should average about 3.8%/year through the turn of the century (Fig. 1 [24992 bytes]).

Since 1990, overall world LPG demand growth in the residential and commercial sector averaged 3.9%/year. Future demand in this sector will be firm and should increase to about 98 million mty in 2000 and 114 million metric tons in 2005.

LPG market activity in residential and commercial markets, however, varies significantly in different regions of the world.

Demand growth has been particularly strong in Southeast Asia, averaging 12%/year since 1990. The Indian subcontinent experienced growth of 9.2%/year over the same time, and the remainder of the Far East recorded 7.6% annual growth since 1990.

Residential and commercial sector growth will be strongest in the developing countries of Asia, Latin America, Africa, Middle East, Eastern Europe, and the former Soviet Union (FSU) through 2005.

Rapid expansion of LPG use in Asian residential and commercial markets is dramatically affecting international LPG markets. Asian demand in this sector alone has increased from 14.7 million mty in 1990 to 22 million metric tons in 1995.

This increase, along with growth in other end-use markets, has prompted the need for significantly greater LPG imports into this region.

Net import requirements in Asia expanded by more than 4.4 million mty since 1990. This growth has absorbed most of the incremental supplies from the Middle East and kept the international supply/demand balance relatively tight.

Petrochemicals

The petrochemical sector is the other major growth market for LPG. This sector currently accounts for around 19% of the total world base LPG consumption. Demand for LPG for the production of petrochemicals has increased rapidly, averaging about 8.4%/year since 1990.

Future growth in this sector will be stimulated by increased butane demand as a feedstock for the production of methyl tertiary butyl ether (MTBE). There will also be increased propane demand as an olefin plant feedstock.

As a result, base demand for the petrochemical sector will increase to about 39.5 million mty in 2000 and 44.6 million mty in 2005.

The dramatic increase in MTBE demand has resulted primarily from the 1990 U.S. Clean Air Act.

MTBE plant capacities significantly expanded in response to the increased need for oxygenates in reformulated gasoline (RFG). Much of this capacity has been based on butane dehydrogenation, significantly increasing the demand for butane feedstocks.

Demand for oxygenated gasoline in the U.S. is expanding more slowly than previously anticipated. Despite this slowdown in worldwide utilization of butane, Purvin & Gertz' analyses show that MTBE manufacture will continue to rise, exceeding 9.6 million mty by 2005.

Feedstock requirements for worldwide olefins manufacture are expanding, growing at about 4.3%/year since 1990. Nearly 98% of the world's current petrochemical use of LPG is contained in five regions: North America, Western Europe, the FSU, Asia, and Latin America.

The Middle East will also emerge as a major base-demand market for LPG petrochemical use through 2005.

In the U.S. olefins industry, LPG and ethane constitute around 75% of the total feed slate. As total requirements for U.S. feedstocks expanded, demand for ethane and propane steadily increased, strengthening the long-term value of both NGL in the U.S. market.

World LPG supply

LPG production is increasing as refineries are added or expanded to meet the rapid increase in demand for transportation fuels, particularly in Asia.

Production from gas processing is also on the rise as Middle East crude-oil production rates ramp up and new gas production and processing facilities are added worldwide.

Total world LPG supplies increased from about 125 million mty in 1987 to an estimated 167 million metric tons in 1995 (Fig. 2 [26610 bytes]).

This increase represents an average growth of 3.8%/year. Purvin & Gertz expects that world LPG supplies will reach 228 million metric tons in 2005, growing at an average rate of 2.4%/year.

From processing

Most of the world's LPG supplies are produced from natural-gas processing.

In 1995, an estimated 103 million metric tons, or about 62% of total world LPG supplies, were extracted from the processing of associated or non-associated natural gas.

In the future, existing gas-processing facilities will operate at higher rates in most major producing regions as crude oil and gas production increase.

The commissioning of several new projects worldwide will also contribute to the increase in LPG recovery from gas processing.

Over the forecast period, world LPG production from gas processing will increase significantly, reaching about 130 million mty in 2000 and 148 million mty in 2005, a growth of 2.5%/year.

From refineries

In 1995, LPG supplies from refineries accounted for about 64 million metric tons, or 38% of total world production.

Refinery LPG production will also grow because of increased refinery throughput, higher conversion-capacity utilization, and more restrictive environmental regulations, particularly gasoline vapor-pressure limits.

As a result, world refinery-LPG production will increase steadily and reach about 73 million metric tons in 2000 and 80 million metric tons in 2005, a growth of 1.5%/year.

Regional outlook

International LPG supplies will rise most rapidly through 2005 in Africa, Asia, the Middle East, and the FSU.

Production in Africa will increase at more than 10%/year through the decade. This growth is primarily the result of two new LPG-export projects in Nigeria and an expansion in Algeria. Most of this capacity will be brought on-line between 1997 and 1999.

In Asia, LPG production is increasing rapidly relative to average world rates. Demand is growing so briskly, however, that even with supply expansion of 6%/year, increased amounts of LPG imports are required each year.

LPG production in Asia is being enhanced short-term by growing refinery production, particularly in developing countries, and by increasing supplies from gas processing, specifically in Malaysia and Thailand.

Purvin & Gertz concludes that the Middle East will continue to be the dominant export supplier of LPG to international markets. Outside of North America, the Middle East is the largest LPG-producing region of the world.

Through 2005, several major Middle East producing countries will implement new projects for increased LPG recovery from gas processing.

Saudi Arabia will expand its Master Gas System by 2005. The system is currently operating at maximum capacity.

Iran will significantly increase its LPG production as a result of the recent expansion at the Bandar Iman complex, additional gas-processing capacity increases, and higher offshore gas production and processing rates.

Iraq could also emerge as a major LPG producer and international exporter during 1997, upon lifting of U.N. sanctions and completion of repairs or reconstruction of war-damaged LPG production and export facilities.

Kuwait returned to full production during 1993-1994 and re-established itself as a major LPG producer and exporter following the Gulf conflict. Supplies will gradually increase as crude-oil production expands.

Qatar commissioned the first phase of its North field project in 1992, which has significantly increased LPG production.

Abu Dhabi has recently expanded its LPG production capacity with the addition of a third LNG train on Das Island and development of an onshore gas-condensate recycling project. As a result, LPG production and exports from the U.A.E. are expanding.

LPG production in the FSU has declined significantly since the mid-1980s but should begin to recover in the second half of the 1990s.

Introduction of western capital and technology will improve the efficiency of LPG recovery from gas processing and enable construction of a pipeline infrastructure for delivering LPG supplies from West Siberia to domestic and international export locations. These developments are anticipated some time after 2000.

Production from Sakhalin Island and increased refinery conversion capacity utilization will contribute to the expansion of LPG supplies in the FSU over the longer term.

LPG supplies are also increasing in Western Europe as new North Sea gas/gas-condensate fields are developed. The build-up in North Sea LPG supplies, which began in 1993-1994, is significantly increasing regional supplies.

North Sea LPG supplies have increased by about 75% since 1990 and will continue to rise through the end of the decade. Refinery supplies are not increasing, but the significant increase in North Sea supplies is providing both additional feedstock for the European olefin industry and new trading opportunities.

International trade

The Middle East dominates the international export market for LPG. Together with Africa, these two regions accounted for an estimated 29.1 million metric tons of net waterborne exports in 1995.

Exports from these regions will expand throughout the rest of this century, exceeding 36 million metric tons in 2000 and 42 million metric tons in 2005 (Fig. 3 [23841 bytes]). The Middle East will continue to account for the lion's share of these exports, with an estimated 33.3 million metric tons production surplus in 2005.

This outlook will undoubtedly require expansion of LPG shipping fleets and possibly the addition or expansion of import and export terminals.

Asia will be the primary consuming market which will absorb these additional supplies. This growth is being driven by rapid expansion of the Chinese and Indian markets, as well as continued demand growth in Korea and much of Southeast Asia.

Higher LPG prices that have resulted since introduction of the new Middle East pricing policy in October 1994, however, could possibly disrupt this trend. Should Middle East LPG prices continue trading at high ratios to competitive fuels, demand growth rates in the Far East could decline as other fuels become favored over LPG.

If Chinese prices prove to be too high, the push toward greater LPG market penetration may stall, tempering the need for imports. The market tightness experienced over the last several years could vanish, at least temporarily.

Historically, world LPG supplies have exceeded base demand requirements. Accordingly, these has been a base surplus in LPG supplies.

In 1995, the world base surplus of LPG was estimated at 7.9 million metric tons. The future world LPG base surplus will range from about 7.4 million to 11.6 million mty through 2000. The base surplus will peak at 12.8 million metric tons in 2005.

These projections indicate a slightly higher LPG surplus than Purvin & Gertz anticipated last year for base demand. Significant price-sensitive petrochemical feedstock demand growth is likely to absorb all the growth foreseen in the world's base LPG surplus.

U.S. NGL supply

The NGL industry in the U.S. is the largest, most highly developed, and most complex in the world. Large volumes of NGL are produced at more than 750 gas plants, primarily located in the southwestern U.S., Gulf Coast, Midwest, and Rocky Mountain region. The U.S. refining industry is also a large producer of LPG.

A complex pipeline and underground-storage infrastructure transports NGL production from Canadian and U.S. gas-processing plants and refineries to storage and distribution centers at Conway, Kan., and Mont Belvieu, Tex.

Propane and butane imports by water are received from the Middle East, Algeria, the North Sea, Venezuela, and Mexico.

U.S. gas-plant production accounted for approximately 74% of total domestic NGL supplies in 1995, including 95% of all ethane supply and 100% of all natural-gasoline supplies.

Refineries also play an important role in domestic NGL supplies, accounting for approximately 47% of U.S. propane production, and 37% of total U.S. n-butane production in 1995.

U.S. production of NGL will grow gradually during the remainder of the decade (Fig. 4 [27554 bytes]) more slowly than in the early 1990s.

U.S. gas processing

Natural gas prices will continue to influence NGL supplies. Relative to 1993 and 1994, spot U.S. gas prices declined somewhat in 1995 before rebounding in late December because of high winter-related demand.

Natural gas prices will rise modestly through 2005 as overall demand increases in the U.S. In real terms (1995 dollars), however, the projected increase in spot gas prices will be modest because of Canada's ability to export gas to satisfy incremental increases in U.S. demand.

During the late 1980s, gas-processing margins were low and ethane recovery was uneconomical in many regions of the U.S. When NGL prices recovered in 1990, gas-processing margins improved dramatically but then declined for several years.

Gas-processing margins in most regions of the U.S. subsequently improved in 1994 and 1995.

U.S. gas-processing margins will likely suffer through another downturn in 1997 because of falling prices for petroleum products after Iraq resumes its exports of crude oil. Margins will become negative, however, in any U.S. region.

After 1997, gas-processing margins will generally trend upward (Fig. 5 [19652 bytes]).

A major factor affecting gas-processing margins for many U.S. gas plants is the economics of recovering ethane.

In 1989, gross margins for ethane recovery fell to 0 or less in most parts of the U.S.. Ethane recovery margins then jumped sharply in 1990 but have eroded during the last few years. Ethane recovery became uneconomical in the Rocky Mountain Overthrust in 1993.

As the downward trend continued, ethane gross recovery margins became negative in most U.S. gas-processing regions during 1995.

Gross margins for ethane recovery will rebound in 1996 because of strong demand for NGL. Although margins should then decline slightly through 1998, ethane-recovery economics will improve for the remainder of the forecast period.

Therefore, ethane supplies from domestic gas-processing plant will not be limited in the future. Ethane recovery is not expected, however, to reach the high margins which were achieved 1990-1992.

The Overthrust is the only U.S. area in which ethane recovery is expected to remain uneconomically long. Profitable ethane-recovery margins in the Overthrust are unlikely until after 2002.

The gross recovery margin is not the only parameter that affects a gas processor's decision to extract ethane.

When ethane is rejected into the product natural gas, some propane (and a small amount of other NGL) is also lost into the gas. The incremental profit of higher recovery rates of the other NGL can offset a small loss incurred by recovering ethane.

Ethane supply

During the past 5 years, total supplies of ethane in the U.S. increased from an average rate of slightly less than 570,000 b/d in 1991 to nearly 618,000 in 1995. Most of this increase was the result of higher production rates from domestic gas-processing plants due to attractive extraction margins in most regions of the U.S.

Conversely, production by refineries was nearly constant at 24,000-29,000 b/d. Imports from Canada increased in both 1992 and 1993 then leveled off at 13,000-18,000 b/d.

Ethane extraction will remain profitable in all major production regions except the Rocky Mountain Overthrust. Production will therefore rise from 587,000 b/d in 1996 to 611,000 in 1999.

Domestic ethane production will then plateau at 616,000-620,000 b/d after 2000, as older gas fields are replaced with new production from leaner reservoirs.

The most notable exception to the trend towards leaner natural gas is the expected rapid increase in production of fairly wet gas production in the Gulf of Mexico offshore from Louisiana.

The potential decline in ethane production should also be slowed by consolidation of gas-processing operations as older, less efficient plants are replaced by newer plants with higher ethane-recovery capabilities.

Although more ethane could be recovered in the Overthrust, current price projections indicate that ethane recovery will unprofitable there until about 2003.

With regard to ethane imports from Canada, 50,000-80,000 b/d of additional supplies could be recovered without significant investments in gas-processing plants and collection systems in Canada. Limitation in the pipeline systems to the U.S., however, has thus far restricted exports from Canada.

Although several projects have been proposed to revamp existing pipelines or build new pipelines to eliminate this limitation, outlook for these projects has been dimmed by two large ethylene capacity additions in Alberta.

Dow Chemical Co. announced plans to expand its existing ethylene plant in Alberta by about 1 billion lb/year. And Nova and Union Carbide jointly announced construction of a new 2 billion lb/year grassroots cracker.

These two ethylene projects will consume most of the additional ethane which appeared to be destined for export to the U.S. Therefore, supplies from Canada will not exceed 30,000 b/d.

Conversely, a second source of future ethane imports-waterborne supplies-received increasing attention in 1995. These supplies could come from oil and gas producing countries in the Caribbean, most likely Venezuela, Mexico, and Trinidad.

Although these waterborne imports of ethane are not a part of Purvin & Gertz' supply/demand balances, the concept could become economically viable some time shortly after 2000.

Propane supply

Unlike ethane which is produced almost exclusively by domestic gas plants, propane in the U.S. is supplied by several sources.

Of the 1.15 million b/d which were supplied during 1995, about 45% was produced by domestic gas-processing plants, 43.5% came from refineries, and 11% was imported.

The refinery component of propane supplies is overstated because U.S. government statistics include refinery propylene production in the data. In 1994, about 50,000 b/d of propylene were included in this propane/propylene production from refineries.

On an annual basis, inventory fluctuations provide a relatively small amount of swing supplies (about 0.5% in 1995). Seasonal changes in inventories from summer to winter, however, are an important component of the U.S. propane market.

Future propane production from domestic gas plants will remain nearly constant at 505,000-510,000 b/d from 1996 through 2005. Conversely, refinery production of propane/propylene will likely be upward because of rising crude-oil throughput, combined with increasingly more severe operating conditions of refinery processing units.

Refinery production will increase a total of about 11% from 509,000 b/d in 1996 to 566,000 in 2005.

To meet rising demand for propane in the U.S., imports must rise relatively quickly during the next 10 years, from 161,000 b/d in 1996 to 315,000 in 2005, nearly 7%/year.

Although imports from Canada will remain an important component of these needed imports, most of the expected increase must come from waterborne sources.

Normal-butane supply

Normal butane in the U.S. is produced domestically by both gas-processing plants and refineries, and these supplies are supplemented by imports.

In 1995, gas plants produced about 63% of the total 372,000 b/d supplied to the U.S. market. Refineries provided nearly 31% of total U.S. supplies, while imports accounted for about 6%.

Production rates of NGL, including n-butane, will remain relatively constant. This outlook is not only based on forecast rising production of natural gas, but also on progressively leaner NGL content in the gas.

Hence, n-butane production by domestic gas-processing plants will remain in the range of 225,000-230,000 b/d throughout the forecast period.

Relatively large amounts of n-butane are generated as a byproduct from refinery operating units, but most of this production is used internally. Production rates often exceed these internal needs, however, particularly during the summer, and refineries sell the net excess production.

Net production of n-butane by refineries has increased significantly since the late 1980s due to EPA's lower gasoline vapor pressure limits during the summer. In 1988, the last year before the lower Rvp limits were imposed, refinery production averaged only 57,000 b/d, compared to nearly 115,000 in 1995.

Most of the mandated reductions in gasoline vapor pressure have now gone into effect, and the relative amount of n-butane production by refineries should not experience any further large shifts.

Rising refinery operating rates and higher severity operation of refinery processing units, however, should cause n-butane production by domestic refineries slowly to increase to 140,000 in 2005.

One important aspect of the n-butane market is the distinction between production by gas-processing plants vs. refineries.

Because n-butane produced by refineries can contain impurities such as olefins and fluorides, it cannot be used by isomerization units or by ethylene plants without first being treated to remove the contaminants. Thus far, only one isomerization unit has installed a pre-treatment facility.

Therefore, the LPG market has developed separate systems on the U.S. Gulf Coast to segregate the two types of n-butane. These two systems are typically identified as the TET (Texas Eastern Transmission) pipeline network, which primarily handles refinery-produced n-butane, and the non-TET systems used for higher quality production from gas plants.

Increased n-butane production by refineries since 1988 backed out imports into the U.S. Before 1988, imports were approximately 50,000 b/d, whereas imports were only 25,000 b/d in 1995.

Rising demand, however, will result in a resurgence of imports beginning in 1996. By 2000, n-butane imports are likely to reach nearly 66,000 b/d.

Isobutane supply

Total U.S. supplies of isobutane have averaged 235,000-245,000 b/d for the last few years. Of this total, about 40%-44% was produced by domestic gas-processing plants.

Refineries sold an average of about 13,000 b/d (only 5% of total U.S. supplies) during 1993-1995. Imports have been near 30,000 b/d, or about 12% of the total, for several years.

The deficit needs for isobutane in the U.S. are filled by production from merchant isomerization units. Isomerization rates rose from 71,000 b/d in 1991 to 94,000 in 1995. Isomerization rates will jump sharply to about 134,000 b/d in 1996 because of an increase in the production of oxygenated and RFG.

Isobutane production from isomerization plants should then climb to 173,000 b/d in 2005. Thus, isomerization rates will likely increase an average of about 2.5%/year, 1996-2005.

This need for increased production by isomerization units is based on an expectation that production from domestic gas-processing plants will remain nearly constant at about 100,000 b/d through 2005. Similarly, refinery net sales will remain near 12,000 b/d.

Much of the isobutane imported into the U.S. is in a mixture with n-butane. Thus, imports of both butanes are intertwined.

Isobutane imports were near 30,000 b/d during 1992-1995. Purvin & Gertz expects imports to jump to about 35,000 b/d in 1996 before rising to nearly 50,000 b/d in 2005, slightly less than 5%/year.

Natural-gasoline supply

Natural-gasoline supplies come from only two sources: domestic gas-processing plants and imports.

Government data differentiate refinery-sourced supplies in a separate category-naphtha. Because natural gasoline must be extracted at gas-processing plants, gas processors cannot adjust production rates by rejecting natural gasoline into natural gas.

Natural-gasoline production is more strongly affected by changes in the production rates of associated gas than non-associated gas.

Production of crude oil, and therefore associated gas, will decline during the forecast period. Therefore, although production rates of the other NGL will likely remain relatively constant through 2005, natural-gasoline production will decline.

Purvin & Gertz' believes domestic production will fall from 325,000 b/d in 1996 to 313,000 in 2005.

Analysis of natural-gasoline imports is somewhat complicated because of the wide diversity of products that are available. Although condensate somewhat resembles natural gasoline, it contains relatively more high-boiling constituents that are similar to those in gas oil.

In the early 1990s, natural-gasoline imports doubled from 23,000 b/d in 1991 to 46,000 in 1995. Imports will likely remain at 46,000 b/d through to 2005.

U.S. NGL demand

NGL's are very versatile hydrocarbons that are used in a wide range of applications in the U.S. Major end-use categories include consumption as petrochemicals feedstocks, refinery feedstocks, fuels, and "other" (Fig. 6 [26098 bytes]).

Ethane demand

In the U.S., ethane is used almost exclusively for the production of ethylene. Virtually all U.S. ethylene plants can utilize ethane, and several plants must crack only ethane because of design limitations of the plants.

During the first half of the 1990s, nearly all new ethylene plants and most expansions of existing plants were based on NGL feedstocks (rather than naphtha and gas oil). Thus, as ethylene production rates increased, ethane consumption rates rose accordingly from about 553,000 b/d in 1991 to 595,000 in 1995.

Based on Purvin & Gertz' price forecasts for ethane, other cracker feedstocks, and ethylene plant co-products, ethane will be a relatively expensive feedstock in the future. Ethane cracking will remain economically viable, however, and thus, cracking rates to rise to 655,000-660,000 b/d after 2000.

This consumption rate could rise further if economical supplies are available (that is, waterborne imports increased production from the Overthrust). Purvin & Gertz believes that ethane consumption by ethylene plants will be limited only by the availability of economical supplies.

The period 2000-2005 will be extremely important to future developments in the ethane market. Before 2000, ethylene producers will primarily build crackers designed to use only NGL because of their perception that supplies will be adequate.

If ethylene producers remain convinced that supplies of NGL feedstocks (primarily ethane and propane) will continue to be available at economical prices, they will build light-feed crackers because of their lower capital costs.

Conversely, if NGL supplies are perceived to be limited, the new crackers will be "flex" plants that can use a wide diversity of feedstocks. Construction of these flex crackers would limit further growth of ethane cracking rates in the U.S.

Propane demand

In the U.S., propane is used in two major markets: fuels and petrochemicals. These two markets tend to be counter-seasonal, with the fuel market typically dominant during winter. As fuel demand wanes during the warmer spring and summer, petrochemical consumption becomes more dominant.

The fuels market consists of several sectors, including residential-commercial, engine fuel, industrial, utility, and agriculture. Propane consumption in all five sectors of the fuels market is expected to increase modestly throughout the forecast period.

Demand by the fuels market will increase from 605,000 b/d in 1996 to 685,000 in 2005-an average increase of 1.2%/year.

The petrochemicals market for propane in the U.S. consists of two major sectors: ethylene and other. Demand by this "other" category will slowly increase at about 1.1%/year to 192,000 b/d in 2005.

The major growth category for propane in our forecast is for the production of ethylene. Propane cracking rates will rise from 344,000 b/d in 1996 to 454,000 in 2005, a growth of 2.8%/year.

Normal-butane demand

In the U.S., most n-butane is used for the production of gasoline, either directly as a blending component, or indirectly via isomerization to isobutane.

Before 1988, refineries directly consumed about 50% of total U.S. supplies of n-butane. Purchases then declined significantly because of lower vapor-pressure limits for gasoline during the summer, falling to only 38.5% in 1995.

Refinery purchases of n-butane will remain nearly constant at roughly 140,000 b/d through to 2005. Isobutane use by refineries, however, and therefore n-butane demand for isomerization, will increase quickly.

The fastest growth in n-butane demand will be for isomerization to isobutane which will then be utilized for refinery-related uses such as the production of alkylate and MTBE.

Isomerization demand will rise from about 94,000 b/d in 1995 to 162,000 in 2000 as a result of increasingly stringent specifications for RFG, a growth of nearly 11.5%/year.

After 2000, n-butane consumption by isomerization units should grow more slowly at only about 1.2%/year, rising to nearly 173,000 b/d in 2005.

As refineries produced more n-butane and purchased less, the additional supplies were used to produce ethylene. Because consumption by crackers is price-sensitive, this use is mostly limited to summer when n-butane prices are depressed by low gasoline vapor-pressure limits.

Annual n-butane cracking rates peaked at 63,000-65,000 b/d in 1994 and 1995.

Cracking rates will likely drop sharply, however, beginning in 1996 as isomerization demand increases in response to increased need for isobutane to produce MTBE and alkylate for RFG.

That annual cracking rate will average only 30,000 b/d through to 2005. Because this use is very seasonal, n-butane rates will likely exceed 60,000 b/d during some summer months and drop to nearly 0 in the winter.

Isobutane demand

The U.S. isobutane market will undergo significant changes during the second half of the 1990s. As for n-butane, these changes will result from government regulations.

The 1990 Clean Air Act (CAA) amendments mandate use of oxygenated and RFG in many large U.S. cities with excessive levels of ozone or carbon monoxide (CO) in the air. Two key gasoline components for production of these new types of gasoline use isobutane as a primary feedstock.

MTBE, one of several gasoline oxygenates, is produced at both refineries and large dehydrogenation units. The dehydro-based plants use isobutane and methanol as feedstocks. Alkylate, the second component, is ideal for production of RFG, and refinery alkylation units use isobutane as one of the feedstocks.

The oxygenated-gasoline program, which began in fall 1992, requires an oxygen concentration of 2.7% (about 15 vol % MTBE) in all gasoline sold in CO non-attainment areas during winter.

Furthermore, beginning in 1995, RFG containing 2.0% oxygen was mandated on a year-round basis for ozone non-attainment areas. Seven isobutane dehydrogenation units with a total capacity of about 78,500 b/d now operate in the U.S. to produce MTBE from isobutylene.

Because MTBE demand has been lower than previously expected, no more dehydro-based plants are likely to be built in the U.S. Isobutane demand for MTBE production will plateau at about 76,000 b/d.

Although this consumption rate is less than was originally forecast in the early 1990s, it represents more than a four-fold increase from the 18,000 b/d consumed in 1991 before the mandated use of oxygenates in gasoline.

The second major change affecting the isobutane market, increased production of alkylate for use in RFG, began in 1995. The 1990 CAA regulations will encourage increased use of alkylate in gasoline because of its excellent blending qualities for the production of RFG-high octane, low Rvp, no aromatics, and no olefins.

Isobutane purchases by refineries will likely jump to 151,000 b/d in 1996 and then rise to about 182,000 in 2005. Because refineries can produce isobutane internally in processing units and isomerization plants, this increase in purchases represents only part of the total increase in consumption by alkylation units.

The third major market for isobutane in the U.S. is for the production of propylene oxide (PO).

Roughly 41,000 b/d of isobutane (about 18% of total U.S. demand) were consumed for the production of PO in the early 1990s. Consumption increased in late 1994 when Texaco Chemicals started up its new plant at Port Arthur, Tex.

PO consumption of isobutane will likely rise steadily from 51,000 b/d in 1995 to 73,000 in 2005.

Natural-gasoline demand

Natural-gasoline consumption in the U.S. can be broadly divided into three main categories-refineries, chemicals, and "other."

Refinery demand includes both direct blending and consumption as a feedstock for C5/C6 isomerization. Chemicals consumption is almost exclusively for the production of ethylene.

Purvin & Gertz' "other" category includes consumption for crude-oil spiking and use as a diluent with heavy crude oils, splash blending into gasoline, and a few smaller miscellaneous uses.

Refinery consumption was typically about 160,000-170,000 b/d during the first half of the 1990s. Refinery demand will likely decline from 173,000 b/d in 1996 to 155,000 in 2000. This gradual drop will result from offsetting factors caused by gasoline reformulation.

First, because of the relatively high vapor pressure of natural gasoline, lower allowable Rvp specifications for finished gasoline will reduce the usefulness of natural gasoline for blending.

Conversely, because oxygenates have high octane values, their mandated use in RFG will offset the low octane value of natural gasoline. Furthermore, most natural gasoline contains only small amounts of olefins and aromatics, which enhances its use in the production of RFG.

Natural-gasoline consumption by ethylene plants has fluctuated in a wide range from 79,000 b/d to 103,000 during the last 5 years. Future cracking rates will likely remain near the high end of this range at about 93,000-100,000 b/d.

The Authors