Far East LPG sales will grow faster than in West

LPG sales through 2010 in regions east of the Suez Canal ("East of Suez") will grow at more than twice those in regions west of the canal.

East-of-Suez sales will grow at more than 4.0%/year, compared to slightly less than 2.0%/year growth in sales West of Suez. East-of-Suez sales will reach 92 million tons/year (tpy) by 2010, accounting for 39% of the worldwide total. This share was 31% in 1995 and only 27% in 1990.

LPG sales worldwide will reach 192 million tons in 2000 and 243 million tpy by 2010. In 1995, they were 163 million tons (Fig. 1 [51473 bytes]).

These are some of the major conclusions of a recent study by Frank R. Spadine, Christine Kozar, and Rudy Clark of New York City-based consultant Poten & Partners Inc. Details of the study are in the fall report "World Trade in LPG 1990-2010."

This report, released recently in three volumes (World Overview, Country Reports, and Statistics & Infrastructure), contains data on and forecasts for LPG production, consumption, international trade, contracts, pricing, shipping, and terminals.

Concentration

Currently, about two thirds of the world's LPG sales are in West-of-Suez markets; one third in markets East of Suez (Fig. 2a [46193 bytes]), says the report.

Until recent years, LPG sales in the East went to Japan, South Korea, and Taiwan. These nations accounted for 63% of LPG sales East of Suez in 1990, 53% in 1995.

Because of the maturity of these markets and the lack of competitiveness of LPG with alternative feedstocks for petrochemicals, LPG demand in these countries will register modest growth, at best, says the report. These markets will account for only 33% of sales East of Suez by 2010.

In the Middle East, potential petrochemical demand for LPG dominates regional consumption trends. This is particularly the case in Saudi Arabia where LPG demand will reach 7.6 million tons in 2000, 11.3 million tons in 2010.

The most rapidly growing markets are in emerging nations (Fig. 2b [46193 bytes]). China and India stand out in the Far East for their LPG sales potentials. Each, with combined populations of about 3 billion, has low per-capita energy and LPG use.

Despite pent-up demand, sales there have been and continue to be constrained by inadequate infrastructure. LPG use in these two countries will reach a combined 15 million tons in 2000 and 27 million tons in 2010, as both foreign and domestic companies invest in LPG terminals and other delivery facilities.

Combined LPG sales in these nations were 9 million tons in 1995 and only 5 million tons in 1990.

LPG use was 2.6 million tons in 1995 and 1.1 million tons in 1990. Saudi Arabia will account for half of LPG use in the Middle East by 2000.

Sales in West-of-Suez markets will expand by about 2%/year through 2010 (Fig. 2c [46193 bytes]). Several factors contribute to the more moderate demand outlook in the West than in the East.

For example, LPG sales, particularly in North America and Europe, are already large. Many of these markets are mature, with little room for expansion of sales in traditional applications. Among important exceptions is Turkey.

Although similar emerging-market developments are occurring West of Suez as in East, says the report, populations in most nations in Africa, Central Europe, and Latin America are small by Asian standards.

In addition, the more populous nations of Latin America (Argentina, Brazil, Mexico, and Venezuela) already have well-developed LPG markets. Thus, volumetric LPG sales potential is much smaller than in emerging eastern markets.

The most promising market for expanding LPG sales is petrochemical feedstock. Ethylene plants in North Europe and the U.S. are large users of LPG, but have alternative feedstock options and are price-sensitive.

The U.S. Gulf Coast can absorb large LPG volumes based on market conditions. The concentration of petrochemical plants, vast Mont Belvieu storage, and LPG terminals enable facilities there to absorb large quantities of LPG when Mont Belvieu prices command a premium over cargo deliveries CIF U.S. Gulf Coast.

Conversely, Mont Belvieu storage is a source of seaborne cargoes when pricing dictates such sales. Poten & Partners expects the Atlantic basin to have ample LPG through 2010 and says that a substantial expansion of price-sensitive sales to petrochemical plants will be required to absorb these volumes.

Another focus of LPG market growth will be in the former Soviet Union (FSU) and Central Europe. Russia, in particular, has significant LPG sales potential when political and economic conditions stabilize. LPG sales in the FSU have collapsed since 1990.

While sales appear to have stabilized, a substantial expansion is unlikely to begin until after 2000. Rising FSU demand will be supplied from production in Russia and the other republics.

Some nations of Central Europe are improving economically. In addition, their LPG industries are attracting foreign companies.

Poland, for example, is emerging as a substantial LPG importer and is diversifying its sources of imports from dependence on overland deliveries from the FSU.

Demand segments

The report noted that LPG market structures contribute to differing trade and price dynamics East and West of Suez (Fig. 3 [40274 bytes]).

LPG sales East of Suez are dominated by residential-commercial. These sales primarily take the form of bottled gas to households and often command premium prices (Fig. 3a [40274 bytes]). They are typically less price-sensitive than other sales.

Emerging market demands are predominantly for bottled gas.

Relatively tight LPG supply largely precludes development of a large petrochemical market for LPG in the Far East where LPG will not be priced competitively with alternative feedstocks.

Most growth in LPG use for petrochemical feedstock East of Suez will be in the Middle East, primarily in Saudi Arabia, where it enjoys a special pricing arrangement. Indeed, the diversion of LPG from export availability will contribute to a tight LPG balance and premium pricing for LPG in the east.

The large concentration of residential-commercial sales causes East-of-Suez LPG purchasers to value security and adequacy of supply.

In addition, a large share of supplies comes from relatively distant markets and is delivered in gas carriers. This has encouraged seaborne trade dominated by term LPG sales and purchase contracts and minimized price competition.

The greater involvement of foreign companies, however, including traders, promises greater competition in supplying emerging markets, said the report. Companies supplying these new outlets will compete with those supplying established markets for available LPG supplies.

In contrast to markets in the east, LPG demand is more evenly distributed across end uses in markets West of Suez (Fig. 3b [40274 bytes]).

A much larger share of the market involves sales to price-sensitive buyers for ethylene feedstock. These buyers can switch between feedstocks, depending on economic considerations.

In addition, there are more numerous sources of domestic LPG supply and a reduced dependence on seaborne imports. Furthermore, sources of seaborne cargoes are usually less distant in the West than East of Suez, with delivery times correspondingly shorter.

There is far less concern about supply security, says Poten & Partners, and thus less dependence on term contracts than is typical of transactions East of Suez.

Seaborne balance

East-of-Suez seaborne LPG supplies will be generally tight through 2010. This is demonstrated by the volumes available for export to West-of-Suez destinations after East-of-Suez demands are satisfied.

In recent years, these volumes were as high as 5.6 million tpy but have declined to about 3.4 million tons in 1995 (Fig. 4 [34942 bytes]).

The report forecasts availability to fall to about 2.2 million tpy by 2000 and to remain at this low level through 2005 before recovering modestly.

The next few years could see a divergence from this long-term trend as new export supplies become available from Abu Dhabi, Australia, and Malaysia.

Moreover, it is assumed that UN sanctions on Iraq will be lifted and the 4 million tpy export plant at Khor al-Zubair will be operating.

Starting in 1998, however, an accelerated diversion of Saudi Arabian LPG production from export to domestic use will likely tighten East-of-Suez LPG markets significantly.

After 2000, rising OPEC oil production will boost associated gas-liquids production, which in turn, will provide greater LPG seaborne availability, somewhat easing tight supply conditions.

Poten & Partners' report cautions that, in its forecast, considerable LPG exports are assumed from Iran and Iraq. Oil and gas developments in both of these countries have been hindered to varying degrees by international and U.S.-led sanctions.

From a resource-base perspective, these countries have large LPG export potentials. When these potentials will be realized is uncertain. For example, LPG exports from Iraq's fractionator at Khor al-Zubair have already been delayed by a decade.

Fig. 5a [38418 bytes] highlights supply trends expected by Poten & Partners in this trading region.

From a demand perspective, rising LPG use in emerging nations is the dominant trend. At the same time, LPG demand growth will slow dramatically in the mature markets of Japan, South Korea, and Taiwan (Fig. 5b [38418 bytes]).

Companies importing LPG into China and India will compete with established Japanese and South Korean buyers for available LPG supplies, both contract and spot. Emerging markets will import 25% of available East-of-Suez LPG supplies by 2000 and 42% by 2010. This compares with 14% in 1995 and only 3% in 1990.

This forecast assumes that Chinese and Indian economies remain on their current courses and that foreign confidence in these countries is not seriously shaken. Development of LPG markets in these countries is unlikely to be smooth.

More than 2 billion people live in these two nations, however, and energy and LPG consumption per capita are extremely low. Both countries are adopting free-market economic policies and opening their energy industries to private companies, domestic and foreign. A continuation of these policies would result in large LPG import demands.

At the same time, the high cost of LPG will diminish its use in price-sensitive applications in Japan and other mature Far East markets.

Furthermore, expanding availability of pipeline gas, from LNG imports, will curtail LPG use in premium cylinder sales and displace bulk sales, including those to city gas companies for the production of manufactured gas.

Less dependent

West-of-Suez LPG markets depend far less on seaborne imports than those East of Suez. Seaborne imports were about 18.3 million tons in 1995. These accounted for only about 11% of total supplies (Fig. 6 [39952 bytes]).

By contrast, says the report, seaborne cargoes accounted for 47% of LPG supplies in markets East of Suez.

Seaborne exports from West of Suez have expanded by 40% since 1990 (Fig. 7 [39988 bytes]). This expansion was centered in the North Sea, where LPG production has doubled since 1990 to 8.1 million tons in 1995. This product primarily found outlets in Northwest Europe, both by further penetrating petrochemical feedstock slates and by displacing longer-haul imports. North Sea producers have also expanded sales to Mediterranean and Transatlantic destinations.

The focus of expansion will now shift to Africa and Latin America. Seaborne volumes from West-of-Suez sources will expand by two-thirds by 2010. These new volumes promise to keep West-of-Suez markets amply supplied, with volumes increasingly destined for price-sensitive petrochemical buyers (Fig. 7a [39988 bytes]).

Africa is the second most important West-of-Suez source of seaborne LPG volumes after the North Sea. It could emerge as the largest supplier soon after 2000.

Algeria is the main source of African seaborne LPG exports, contributing more than 90% of the total in 1995. Algerian LPG exports will rise from 3.6 million tons in 1995 to 6.0 million tons by 2000 or soon thereafter.

Libya is the other nation in North Africa with considerable LPG export potential. But the country's plans to export up to 1 million tpy have been stymied by international sanctions, says the report.

West Africa today is only a marginal supplier of LPG to international markets but is set to become an important source from the late 1990s.

Congo will emerge as the next West African LPG exporter after Angola, when Elf and its joint-venture partners start LPG production at the N'Kossa offshore development this year. Nigeria will come forth as an LPG exporter soon thereafter. The volumes from Nigeria promise to be much larger.

Disposing of these large African volumes could challenge producers. Some potential exists for additional sales to Mediterranean outlets, as markets expand and Middle East supplies shrink.

Much of the incremental African production, however, will have to move to Transatlantic destinations, in competition with Western Hemisphere supplies.

Western sources

Seaborne cargoes originating from Western Hemisphere sources, although only about 2.8 million tons in 1995, will more than double by 2010 (Fig. 7b [39988 bytes]), says Poten & Partners' report.

A significant portion of this is in the Caribbean basin small-cargo market. As exports rise, however, an increasing share will move in large-cargo lots.

Venezuela is the largest source of seaborne cargoes in the Western Hemisphere. The country's LPG exports totaled 1.2 million tons in 1995, owing to the start-up of the third train at Jose (Accro-I) and the Acogas project.

This was a sharp increase from 331,000 tons in 1993. Corpoven expects LPG exports to exceed 5 million tpy by 2005, a forecast Poten & Partners says may prove to be optimistic.

The vast resource base and the opening of the energy industry to foreign investors, however, ensure that Venezuela will become an increasingly important LPG supplier to regional LPG markets in the future.

Argentina is emerging as an important regional supplier. LPG exports reached 0.5 million tons in 1995. Most of these volumes, however, were delivered overland or by barge to neighboring countries.

If Project Mega (a joint venture between Argentina's YPF and Brazil's Petrobras) proceeds, LPG exports will reach 1 million tpy by 2000 or soon thereafter. This will boost seaborne exports to Brazil.

Despite the nation being a major energy producer and exporter, Mexico is a net LPG importer. In 1995, LPG imports totaled 1.1 million tons, mainly overland from the U.S., while exports reached 0.8 million tons. Imports in 1996 will be even higher, says the report, thanks to an explosion at a major gas-processing complex (OGJ, Aug. 5, 1996, p. 22).

LPG exports included about 0.1 million tons overland to Central America. Seaborne LPG exports will be further curtailed in the future.

Other seaborne LPG exports (Fig. 7b [39988 bytes]) include cargoes from the U.S. (excluding sales to the Far East), Trinidad, and in the future, Colombia, and Peru.

These two South American nations will likely become substantial LPG exporters, based on processing of Cupiagua and Cusiana gas in Colombia and Camisea gas in Peru.

Largest trading region

Because of high shipping costs for LPG cargoes, Atlantic basin production will be sold into regional markets, with the possible exception of an occasional spot cargo, says the report.

The nations of Western Europe, North Africa, and the Eastern Mediterranean comprise the largest seaborne LPG trading region West of Suez (Fig. 8 [24407 bytes]). Seaborne cargoes account for nearly 40% of supplies into this 32 million tpy market.

Net "imports" (Fig. 8) provide a reasonable estimate of seaborne trade in Northwest Europe and the Mediterranean. It includes all regional use of North Sea production (including that in Norway and the U.K.), North African production that is traded internationally, and imports from the Middle East and elsewhere.

Poten & Partners treats the North Sea as a producing region because LPG produced there is mainly moved to market in gas carriers.

There are two distinct foci of LPG seaborne trade in this region. One is in Northwest Europe, where seaborne trade totaled 7.3 million tons in 1995. The other is in the Mediterranean (including southern Europe and North Africa), where it reached 5 million tons in that year.

Seaborne trade in Northwest Europe is dominated by North Sea LPG production. The doubling of this production in the past 5 years has displaced most long-haul seaborne cargoes into Northwest Europe.

North Sea LPG contributed more than 70% of cargoes delivered into Northwest Europe in 1995, compared to less than half in 1990.

Deliveries into this market from the Middle East have virtually disappeared, down from 1.5 million tons in 1990, and those from Algeria have been nearly halved from 900,000 tons in that year.

North Sea production will dominate seaborne trades in Northwest Europe for the foreseeable future (Fig. 9a [33741 bytes]). At the same time, rising exports from Algeria will compete strongly with other potential suppliers for sales into Northwest Europe that are not taken by North Sea producers.

Potential seaborne exports from Russia would be destined for Northwest Europe outlets and remain a wild card in the supply outlook. Even without Russian product, this market promises to be amply supplied.

The strategically located Mediterranean LPG market will be increasingly competitive (Fig. 9b [33741 bytes]). Seaborne cargoes into this market are mainly supplied by Middle East producers and Algeria. A sizable small-cargo trade supplements LPG trades in large gas carriers.

Algeria is about to realize a near doubling of its LPG exports and will seek to place rising volumes in Mediterranean outlets, as well as in Northwest Europe and Transatlantic markets. At the same time, North Sea producers will seek to maintain and possibly expand sales in these same markets.

Moreover by 2000 or soon thereafter, more than 1 million tons of new LPG exports will come from West Africa (Nigeria and the Congo). Some of these volumes will be targeted for sales into European outlets, particularly in the Mediterranean, though most of this product will likely move to Western Hemisphere destinations.

North American supplies

Seaborne cargoes imported into the Western Hemisphere are relatively small compared to sales volume, which totaled 75 million tons in 1995 (Fig. 10a [50997 bytes]). Most supplies are from regional sources.

LPG production in the U.S. alone totaled 45.7 million tons in 1995. Canada and Mexico also have large energy industries boosting LPG production in North America to 60 million tpy.

In contrast, Middle East LPG production was only half of this in 1995, or 30.4 million tons. LPG production in Latin America is relatively small at 11.4 million tons in 1995. This production is concentrated in Venezuela, Brazil, and Argentina.

There is considerable overland trade between countries in North America where LPG infrastructure is increasingly being integrated. This is encouraging a burgeoning overland trade.

A well-developed pipe line infrastructure already links Canada's Alberta Province, the center of that nation's LPG production, with the U.S. LPG market. Overland exports from Canada into the U.S. typically run from 2.0-2.5 million tpy, says the report, citing U.S. statistics.

Downstream Mexican LPG and natural-gas businesses are being opened to private company participation, and LPG infrastructure is being built to deliver additional LPG from the U.S. into Mexico. Overland LPG trade from the U.S. to Mexico already surpassed 1 million tpy in 1995. Other overland movements are relatively small.

Large domestic productions in the largest LPG-consuming nations in the Western Hemisphere and the size of overland trade between countries limit the size of seaborne trades, about 6.1 million tons in 1995.

By contrast, LPG seaborne trades East of Suez were about four times as large in 1995, and those in Northwest Europe and the Mediterranean were about twice as large.

The most important destination for seaborne cargoes is Brazil which imported more than 2 million tons in 1995, mainly in large fully refrigerated cargoes. The main supplier to this market has been Saudi Arabia, followed by Algeria.

Competition for sales into this nation promises to intensify, says the report, as rising Atlantic basin production competes for sales in Western Hemisphere outlets.

The U.S. is the other main destination for large LPG cargoes. The U.S. East Coast requires seaborne imports to meet peak winter demands and is weather-dependent.

Buyers on the U.S. Gulf Coast can absorb large LPG volumes when international LPG prices are weak relative to those at Mont Belvieu. Volumes either move into storage or are used as feedstock at nearby petrochemical plants (Fig. 10b [50997 bytes]).

LPG imports into the U.S. Gulf Coast will likely reach nearly 3 million tpy by 2000 and slightly more than 6 million tpy by 2010. The U.S. Gulf Coast could increasingly be the destination for rising exports from Africa and Latin America as producers compete for outlets in an amply supplied Atlantic basin seaborne trade region.

Other destinations for large-cargo LPG imports include the nations on the West Coast of South America and Mexico. Energy-industry deregulation and growing participation of private companies are boosting demands for LPG imports.

There is also an active small-cargo trade of about 1.5 million tpy. About 1 million tons of this are in the Caribbean basin. These trades command premium prices, providing an attractive market for LPG sales from Venezuela, Trinidad, and Mexico.

Ample supplies

In the past, the main sources of large-cargo LPG imports into the Western Hemisphere were the Middle East and Algeria. In recent years, North Sea LPG has become an important supply source for the U.S. East Coast. Angola is a source of modest supplies into Latin America and will soon be joined by Congo and Nigeria (Fig. 10c).

Western Hemisphere markets promise to be amply supplied in the future as new Atlantic basin production looks for sales outlets, says Poten & Partners' report.

Additional volumes from Algeria and West Africa will compete with rising regional production for sales in Western Hemisphere outlets. Regional producers also plan large increases in export.

Venezuela, the largest regional source of seaborne cargoes, plans a series of gas-processing plants that would boost LPG exports substantially.

The opening of the upstream industries has already made Argentina an important regional supplier and promises to do the same for Colombia and Peru.