Latin American LPG production could overwhelm demand

May 18, 1998
New and planned Latin American LPG plants will prompt the fastest rise in regional LPG supplies in history. Some producers, in fact, risk adding supplies too quickly, depending on the country and the markets they serve. That's the message delivered by Purvin & Gertz Inc., Houston, to its annual U.S./International LPG Seminar held recently at The Woodlands, Tex.
Warren R. True
Pipeline/Gas Processing Editor
New and planned Latin American LPG plants will prompt the fastest rise in regional LPG supplies in history.

Some producers, in fact, risk adding supplies too quickly, depending on the country and the markets they serve.

That's the message delivered by Purvin & Gertz Inc., Houston, to its annual U.S./International LPG Seminar held recently at The Woodlands, Tex.

Craig Whitley, Purvin & Gertz senior principal, said it could take several years for domestic Latin American LPG demand to absorb surplus supplies if projects come on as planned and demand builds at rates predicted by state-owned oil companies and major producers for their respective countries.

Two such sources for increased LPG supplies, Bolivia and Mexico, were subjects of presentations at the meeting.

The massive cross-border Bolivia-Brazil pipeline will, by virtue of the more than 750 MMcfd additional gas needed to fill it, prompt significant additional volumes of LPG.

Bolivia cannot begin to absorb the extra LPG and will be looking for export markets, according to Empresa Petrolera Chaco S.A. (Chaco).

In Mexico by 2005, LPG production will exceed domestic demand by as much as 80 million b/d and will position the country to participate for the first time in potential export markets in the Atlantic Basin and the Far East, according to an update from Pemex Gas y Petroqu!mica B sica (PGPB).

Atlantic Basin production

Purvin & Gertz' Whitley said that Atlantic Basin supply growth is already being felt in the marketplace, as contracts to import LPG into the U.S., particularly to the East Coast, are being negotiated at prices and differentials to Mont Belvieu once believed impossible.

On average, he said, there has been a $0.02/gal price reduction relative to Mont Belvieu for East Coast U.S. propane import prices for 1998-1999.

This outlook for Latin American LPG markets and for the Atlantic Basin undoubtedly implies a drop in LPG price relationships to other petroleum products.

Whitley said it will not be surprising to see Mont Belvieu spot propane, for example, drop to a sub-70% annual average to West Texas Intermediate (WTI )crude oil, perhaps in the 65-69% range for 2-4 years after 2000.

Economic, demand growth

The primary factors affecting long-term LPG demand are economic growth and population growth.

Population growth will obviously increase demand for LPG because the more people who require LPG the greater the demand for the fuel. A period of zero growth in gross domestic product (GDP) often witnesses a modest rise in LPG demand that can be attributed to population growth.

For countries that have experienced very positive GDP growth in recent years, however, LPG demand usually grows closer to the growth in GDP than to the growth in population because population grows at a typically lower rate, less than 2%/year in most nations, said Whitley.

Fuel competition, particularly in nations that heavily subsidize kerosine, often prevents LPG demand from growing as fast as it otherwise would because LPG is a more efficient cooking fuel than kerosine. Additionally, large natural-gas-producing nations often sell natural gas far below domestic LPG prices which threatens LPG demand.

Over and under supply or temporary periods of very high prices due to cold weather often affect LPG demand, particularly for short periods.

Based on some of these factors, particularly issues of economic and population growths, Whitley reviewed current and near-term LPG-industry issues in Latin America, starting with historical LPG demand growth (Fig. 1 [108,481 bytes]).

Latin America (Mexico, nations of the Caribbean, Central America, and South America) in 1985 consumed 13.8 million metric tons of LPG. Since 1985, LPG markets of Latin America have almost doubled, to an estimated 24.6 million metric tons in 1997.

Whitley's review of Latin American LPG residential/commercial demand (in kg/capita consumed in 1997; (Fig. 2 [55,136 bytes]) revealed the following:

  • Mexico leads, while Brazil ranks a distant eighth.
  • Chile ranks second, Ecuador third.
  • Two Caribbean nations, the Dominican Republic and Puerto Rico, round out the top five.
  • U.S. residential/commercial LPG market size, by comparison, would not put it in this five.
With the exception of 1997, growth in Latin American LPG demand follows a profile of growth in GDP.

And, said Whitley, as the economies of Latin America have improved and residents increased their levels of disposable income, overall demand growth, which has ranged 3-7%/year, has actually out-performed GDP growth every year except 1997 (Fig. 3 [52,441 bytes]).

Among the many issues that face Latin America's LPG industry, the major ones include:

  • The many new supply projects coming on stream and in a relatively short period of time.
  • These will likely bombard Brazil with several new supply sources.
  • Elsewhere, Mexico's LPG trade imbalance has improved immensely now that the large Cactus gas plant has returned to production. As new production projects come on stream in Mexico, therefore, its needs for waterborne imports will decline.
  • In Venezuela, many bidders have retreated from bidding on the huge Accros III/IV MEGA gas-plant project over several issues, including political, pricing, product specifications, and market-territory exclusions.
  • Bolivian LPG production will likely rise by 23,000-33,000 b/d through 2001. Should Mobil and Shell remain committed to the Camisea project (OGJ, Apr. 13, 1998, p. 40), Peru and Bolivia may possibly begin to compete for the same markets.
  • More deregulation will occur in the industry, with major plans being developed or implemented in Brazil, Bolivia, Venezuela, and Mexico.
  • Also, questions remain over the impact of natural gas and deregulation of LPG prices on future market growth, particularly in Mexico, Venezuela, and possibly Brazil.
  • And the final issue is the question of planned new supply projects and whether supplies are growing too fast relative to Latin American LPG demand.

Rapid supply build-up

Major new production projects planned for the region include the following:
  • In Argentina, Transportadora del Gas Sur (TGS), an affiliate of Enron, is expanding its General Cerri plant and will bring on stream 300,000 metric tons of LPG this year.

    YPF, Dow Chemical, and Petrobras have formed a joint venture to build the huge 650,000-metric ton MEGA project gas plant that will likely come on stream by 2002 and whose production will be destined to Brazil.

    In addition, there are plans to build five other smaller gas plant projects that will come on stream between 1998 and 2001 and add another 386,000 metric tons of LPG supplies to Argentina, increasing the nation's level of LPG exports.

  • The 350,000-metric ton Amazonas gas plant is currently under construction in Brazil and will come on by yearend.
  • New production is expected in Bolivia which will come on stream between 2000 and 2001 and could add 600,000-1 million metric tons of LPG production there.
  • Pemex' current plans call for adding more than 1.8 million metric tons of new LPG production from various new gas-plant projects between now and 2005.
  • The large Accro III/IV plant in Venezuela would add another 1.02 million metric tons of new Latin American LPG supply and should come on stream in 2001.
  • Finally, the Phoenix Park plant in Trinidad is being expanded and will result in 300,000 metric tons of new supplies in 1999.
All these planned projects, if built, will add more than 6.6 million metric tons of annual LPG production, with most coming on stream between now and 2002.

In the past, it has taken the Latin American LPG market 6 years to grow 6.6 million metric tons, yet most of this new supply will come on stream in 4 years.

Planned new supply projects in Algeria, Nigeria, the North Sea, and other areas give cause for concern over the rapid buildup of LPG supplies in the Atlantic Basin, especially coming on stream during a time when Latin American supplies are building rapidly.

Propane and butane production from the U.S. Gulf Coast could easily add 100,000-130,000 bbl of new propane and butane supplies to the market over the next couple of years.

Another 1 million metric tons are expected from the North Sea; 400,000 metric tons of new annual production have already come on stream in the Congo which could increase to 500,000 metric tons/year in the future; Chevron has already brought its 250,000 metric ton/year Nigerian project on stream; and Mobil will soon be shipping a million metric tons of new supplies annually from its OSO project in Nigeria.

Growing Algerian production will likely push total supplies from this nation to grow by 2.5 million metric tons 1997-2000 and possibly add another 3 million metric tons during 2001-2005.

Economic support?

A look at the economic outlook for Latin America, said Whitley, will reveal if these new supply projects present any problems (Fig. 4 [51,306 bytes]).

Economic growth was flat in 1995, mostly due to the devaluation of the Mexican peso, but rebounded to 3.5% in 1996 and 4.6% in 1997. A slowdown to 2.5% growth this year is likely, partially as a result of the negative impact on Latin America of the Asian financial crisis and stock market crashes earlier in the year.

A rebound to 3.9% in 1999 is probable, and annual growth through 2005 will run between 4.3 and 5.4%.

Population growth will likely drop from 1.8% in 1999 to 1.7% in 2000 and remain at 1.7% through 2005, said Whitley, citing the Population Reference Bureau, Washington, D.C.1

GDP growth 1998-2005 for Mexico, Argentina, Brazil, and Chile will rebound after 1999 to 4-6% in these countries.

Outlooks for GDP growth in Venezuela, Peru, Ecuador, and Colombia show similar profiles, with Peru growing 5-6%/year and Ecuador at 3-4%/year. Venezuela and Colombia fall in the middle of this group.

Three cases

Whitley presented three different demand cases vs. total LPG supplies in Latin America to help make sense of the trends.

His supply outlook included only those projects that have been announced and are in the planning or construction stages; it excluded any speculative LPG plants or production projects.

The shaded background (Fig. 5 [46,505 bytes]) area reflects the outlook for total Latin American LPG supplies if all these projects come on stream.

Case 1 reflects actual historical demand for LPG as well as the base case for future LPG demand which is based on the outlook for LPG demand if it grows at its previous 3-year average growth rates.

Case 3 (high case) reflects a high case for LPG demand, which is based on Purvin & Gertz' outlook for future Latin GDP growth rates, previously discussed.

Case 2 (low case) illustrates LPG demand based strictly on the outlook for population growth.

For 1985-1991, Latin America was in supply/demand balance, with domestic supplies equaling LPG demand.

Then, as its economy improved and disposable income increased, growth in demand and a significant slowdown in new supply projects resulted in a large deficit of LPG, with 1997 reflecting a combination of these two fundamentals plus the impact of the Cactus gas-plant production declines associated with the July 1996 explosion.

Just as importantly, none of these three demand cases is sufficient to absorb all the new supplies planned for Latin America. Consequently, Latin America would swing from a net importer to a net exporter of LPG under any of these three outlooks for LPG demand if all of these new projects come on stream.

Fig. 6 [101,261 bytes] shows how great the imbalance might be if the future LPG demand outlook of Purvin & Gertz were accepted. This outlook is based on data and forecasts submitted by Latin American government personnel and private companies, as well as by state-owned oil companies.

The outlook for LPG demand, then, from individual state-owned oil companies and major producers in the free markets of Latin America, when compared with the same outlook for LPG supply as shown in Fig. 5, demonstrates that with planned supply projects, Latin America will swing from a net import region of 3.2 million metric tons in 1997 to a net exporter of 3.3 million metric tons in 2002 and 5.3 million metric tons in 2005.

Whitley concluded that it will take a more robust economy in Latin America with higher GDP growth rates than are in the Purvin & Gertz outlook to keep Latin America from becoming a net export region and having a surplus of LPG production.

Bolivia

Start-up of the huge Bolivia-Brazil natural-gas pipeline later this year or in early 1999 will not only push more than 1 bcfd of natural-gas to Brazilian markets but also have a dramatic effect on production of all petroleum products from Bolivia, including LPG.

That was the assessment of Norm Anderson, vice-president of commercial development for Empresa Petrolera Chaco S.A. The consortium is owned 50% by Amoco and partners and 50% by Bolivian pension funds. In April 1997, Amoco capitalized Chaco with an investment of $306 million and operates the company.

Chaco produces more than 11,000 b/d of crude and condensate and sells 60-80 MMcfd. LPGs are produced by Chaco at 300-350 metric tons/day. All production, said Anderson, is capacity constrained by a limited natural-gas market but will be increased once the pipeline between Bolivia and Brazil comes on line.

Forecast completion of the first approximately 1,000-mile leg of the $1.5-2 billion project is set for December 1998. That 32-in. line will move more than 1 bcfd of gas initially into the Rio de Janeiro-Sao Paulo area. A southern leg, approximately 600 miles, will then be built to the states of Parana, Santa Catarine, and Rio Grande do Sul (Fig. 7 [66,102 bytes]).

Currently, Bolivia produces more than 300 MMcfd of which about 200 MMcfd are exported to Argentina and 120-130 MMcfd consumed within Bolivia (Fig. 8 [44,498 bytes]).

Anderson said that with start-up of the Bolivia-Brazil Pipeline and with no major change in current yields, Bolivia will move into significant LPG oversupply. Fig. 9 [43,405 bytes] shows that in 2003 production will exceed demand by something like 1,000 metric tons/day.

Currently within Bolivia, there are three gas-processing plants. Two, Carrasco and Vuelta Grande, are operated by Chaco with production averaging more than 240 metric tons/day or 57% of the total Bolivian production. The third plant is operated by Andina S.A., a consortium including YPF Argentina, Perez Companc, and Pluspetro.

Existing processing facilities are sufficient for initial Bolivia-Brazil Pipeline gas deliveries, said Anderson. Soon after start-up, however, additional treating facilities will be needed. The size and location of a new plant are being studied by industry.

Although reasonably well-developed pipelines exist to deliver LPG to the main population centers in Bolivia, export is another matter, said Anderson.

To handle the volumes forecast with initiation of Bolivia-Brazil Pipeline gas sales, export infrastructure will need to be developed.

Anderson also said that current significant LPG pricing anomalies throughout the Southern Cone result from inequities in supply and demand, differential transportation charges, as well as variances in government policies.

Bolivian LPGs are favorably positioned, both in terms of price and by virtue of reduced transportation costs to capture market share in neighboring countries.

LPG produced as a consequence of increased gas production for the Bolivia-Brazil Pipeline will compete against production sources, especially such large projects as MEGA in Argentina and Camisea in Peru.

Bolivia is, however, well positioned to compete for selective markets such as in western Brazil, northern Chile, and southern Peru, said Anderson.

Mexico

LPG production in Mexico will increase substantially by 2005, up to 400 million b/d from its average throughout the 1990s of 248 million b/d (Fig. 10 [86,146 bytes]) , said Salvador García-Luna Rodríguez, PGPB vice-president for LPG and NGLs.

The increase will come from plants operated by PGPB as the result of new gas production from such projects as the Cantarell field in the southern part of the country and the Burgos area in northeast Mexico.

García-Luna said that as of March 1998, PGPB's production had increased by approximately 20 million b/d after the late February start-up of a new cryogenic plant in Nuevo Pemex and revamping of the Cactus plant in March.

LPG domestic demand has grown at 4%/year in the last 10 years. Average LPG consumption in Mexico for 1997 was 282 million b/d and by 2005 will reach 340 million b/d or about 22% higher than 1997 (Fig. 11 [85,385 bytes]).

Currently a net importer of LPG, Mexico will by 2005 be a net exporter of LPG in volumes exceeding 80 million b/d (Fig. 12 [67,999 bytes]). Nevertheless, said García-Luna, the long distances between LPG plants in the isthmus and markets in northern Mexico will force the country to continue importing LPG in the next few years in volumes of about 30 million b/d.

Reference

  1. World Population Data Sheet-1997. Population Reference Bureau, Washington, D.C.

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