World NGL markets continue rapid expansion

Ken Otto, Ron Gist, Craig Whitley
Purvin & Gertz Houston

Rick Haun
Purvin & Gertz Dallas

Record-high North American inventories as a result of El Niño-driven warmer weather should return to normal levels in about a year.

In Asia, the economic downturn will only have minimal direct impact on LPG demand there.

The weaker Asian economies, however, will result in a slowdown in petrochemicals production for several years and a corresponding reduction in total demand for feedstocks, including LPG.

But other uses for LPG in the region should be relatively unaffected by the weak economies, and demand should continue to expand.

As for regional supplies, within producing nations in the Middle East, rising demand should curtail exports somewhat. Thus, the supply/demand balance will likely tighten in the region East of the Suez Canal ("East of Suez").

West of Suez, production will increase quickly in such areas as the North Sea, Algeria, Congo, Nigeria, Venezuela, and the Gulf of Mexico offshore Louisiana. Thus, the LPG supply/demand balance should shift toward a slightly oversupplied market.

In the U.S., NGL production from domestic natural-gas processing plants should increase at about 1.9%/year. U.S. refineries will also contribute to U.S. supplies, growing at about 1.2%/year. And net imports should nearly double between 1998 and 2005.

As for U.S. NGL demand, "other" chemical feedstocks will grow at a strong rate of 1.6%/year. More importantly, ethylene will be the major growth market for NGL in the future, increasing at an average rate of about 3.8%/year.

This growth will result from an increase in both base demand (an indication that the industry will continue to build crackers based on NGL) and price-sensitive cracking (as a result of attractive cracking economics of using NGL to produce ethylene).

Background, developments

The international LPG industry has expanded rapidly during the 1990s and undergone significant changes.

LPG consumption has expanded at nearly twice the rate of world petroleum demand. In particular, LPG use in residential and commercial markets has more than doubled in many developing countries.

Markets for LPG and other petroleum products have been opened in many countries, accelerating demand growth and creating investment opportunities in all downstream segments.

This has led to an overall strengthening of global LPG pricing and the development of many new export gas-processing projects.

While the overall trend has been toward a strengthening LPG market during the 1990s, there are and will continue to be significant variations in market conditions and pricing year to year. The contrast between the winters of 1996-97 and 1997-98 is striking.

In winter 1996-1997, it seemed that most of the market pressures were in the favor of producers and traders, and LPG prices rose accordingly. Winter heating demand in North America was strong, contributing to relatively low inventories.

The loss of gas-processing capacity in Mexico led to unexpectedly high imports to meet domestic LPG-market requirements. Seasonal demand was particularly strong during the early part of the 1996-97 heating season across much of the Northern Hemisphere. Crude-oil prices remained surprisingly high during most of 1997.

All of these market conditions led to firm LPG prices and strong price relationships to petroleum during winter 1996-97.

The market conditions that occurred in winter 1997-98 appeared to be almost opposite those observed in the previous year. Winter heating demand was down in most of the major world LPG markets, an effect of El Ni?o weather patterns.

In response to very high LPG prices the previous year, Chinese refinery LPG production was boosted by over 20%. This rise in domestic supplies sharply reduced the need for imports to less than anticipated levels. As a result, LPG imports into China did not increase significantly between 1996 and 1997.

The Asian financial crisis also provided a negative signal to the market as it became apparent that the high growth seen in many Southeast Asia markets might recede somewhat, at least over the short-to-medium term.

Downward supply/demand pressure finally caught up with petroleum markets during late 1997 and the first part of 1998. This oversupply led to a slide in crude-oil prices and provided additional downward pressure on world LPG prices.

With the combination of all of these factors, it is not surprising that LPG prices were abnormally soft during the 1997-98 winter season, both on an absolute basis and relative to crude oil.

The recent downturn in LPG prices raises the issue of whether the current market weakness signals a lasting shift in market dynamics or is simply the result of a combination of unusual events.

Purvin & Gertz believes the latter explanation to be more probable.

Long-term-growth prospects remain high in most developing world markets, and expansion in world petrochemical feedstock markets continues to be strong relative to most fuels markets, in spite of some moderation in global growth rates for petrochemicals.

World LPG demand

The global balance between LPG supply and demand has been relatively tight through most of the 1990s. Of course, fluctuations in market pressures occur routinely, often due to such unpredictable events as abnormal weather patterns and supply outages.

Approximately 95% of total world demand for LPG, on an annualized basis, occurs in end-use markets that are relatively insensitive to fluctuations in price. Examples of such 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 137 million metric tons per year (mty) in 1990 to an estimated 179 million mty in 1997. This increase represents an average growth rate of 3.9%/year since 1990.

Markets for LPG expanded in all end-use sectors during this period. Growth has been particularly strong 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 2005 (Fig. 1 [40,910 bytes]).

Residential, commercial market

Since 1990, overall world LPG demand growth in the residential and commercial sector averaged 4.9%/year. Future demand in this sector will be firm and should increase to about 103 million mty in 2000 and 120 million in 2005.

Activity in the LPG residential/commercial market, however, varies significantly in different regions of the world.

Demand growth has been particularly strong in Southeast Asia during the 1990s, averaging nearly 12%/year in the residential/commercial sector. This growth has been slowed somewhat recently by the Asian financial crisis.

Over the long-term, however, strong growth in this end-use sector should continue in Southeast Asia. The Indian subcontinent experienced average LPG-demand growth of about 10%/year in residential/commercial markets since 1990.

The Far East markets grew by an average of about 9% over the same period. Demand growth in markets outside of Japan (China, Korea, etc.), however, was considerably higher than this would indicate because the Japanese market is mature and remains a relatively large portion of the total Far East market.

Residential/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/commercial markets is dramatically affecting international LPG markets. Asian demand in this sector alone has increased from 14.7 million mty in 1990 to 23.7 million in 1997.

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

Net import requirements in Asia expanded by more than 5.7 million mty since 1990. This rise in import requirements was a result of the particularly sharp increase in LPG demand in the residential/commercial sector.

While Asian LPG supplies expanded by more than 60% during this 7-year period, significantly higher imports were required to keep pace with demand. As a result, Asian market growth 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 7%/year since 1990.

Growth in this sector was stimulated by increased butane consumption as feedstock for the production of methyl tertiary butyl ether (MTBE) during the first half of the 1990s. LPG consumption in this application expanded by more than 140% since 1990, but the growth rate has slowed in recent years.

Several additional MTBE plants are being developed worldwide, and butane consumption in this end-use sector could surpass 9 million mty if these plants are constructed.

Feedstock requirements for worldwide olefins manufacture continue to expand rapidly, increasing by an average rate of 4.6%/year since 1990. On a worldwide basis, LPG accounts for only around 12-15% of total olefin production. As a result, utilization of LPG as olefin plant feedstock is generally constrained by the availability of sufficient supplies.

Total consumption of LPG olefin plant feedstock is around 22 million mty. Consumption of LPG in this end-use application has grown at about 3.2%/year on average since 1990. This growth is somewhat slower than the overall market growth as a result of relatively tight LPG supply/demand balances on global LPG feedstock use.

Nearly 98% of the world's current petrochemical use of LPG is contained in five regions: North America, Western Europe, FSU, Latin America, and Asia. North America is the largest consuming market in this end-use application.

The Middle East is emerging as a major market for LPG petrochemical use. LPG is being utilized as feedstock to manufacture olefins, aromatics, and MTBE in the region. Several new petrochemical complexes are being added and regional LPG consumption will significantly rise before 2005.

World LPG supply

LPG production is increasing worldwide as refineries are added or expanded to meet higher demand for transportation fuels.

This trend has been particularly true in Asia where growth in refinery LPG supplies has averaged nearly 7%/year since 1990. In 1997, LPG supplies from refineries accounted for about 70 million metric tons, or 39% of total world production.

Refinery LPG production will continue to 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 to reach about 76 million metric tons in 2000 and 84 million metric tons in 2005, a growth of 2.3%/year.

Most of the world's LPG supplies are produced from natural-gas processing. Production from gas processing is rising with new gas production and as utilization of existing gas plants gradually increases.

In 1997, an estimated 110 million metric tons, or about 61% of total world LPG supplies, were extracted from the processing of associated or nonassociated 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 127 million mty in 2000 and 156 million in 2005, a growth of 4.5%/year.

Total world LPG supplies increased from about 140 million mty in 1990 to an estimated 180 million mty in 1997 (Fig. 2 [39,538 bytes]). The increase represents an average growth of 3.6%/year. Purvin & Gertz expects that world LPG supplies will reach 240 million metric tons in 2005, growing at an average rate of 3.7%/year.

Regional increases

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

Production in Africa is increasing primarily as a result of new LPG-export projects in Nigeria and the Congo as well as expansions in Algeria. Total LPG production in the region is around 10.2 million mty, up about 38% from 1990 levels. Purvin & Gertz expects regional LPG supplies to expand by an average of over 6%/year 1997-2005.

In Asia, LPG production is increasing rapidly. Demand is growing so fast, however, that even with supply expansion of more than 7%/year, increased amounts of LPG imports are required each year.

LPG production in Asia is 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 expects 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.

LPG production in the Middle East expanded significantly 1990-1997, rising by an average of slightly more than 5%/year.

The rate of increase has slowed in recent years, and it now appears that regional LPG production will remain relatively flat through 2000. This slowdown is occurring as a result of limited new export-oriented LPG projects over the next few years and a stagnant outlook for crude-oil production in the region as a result of a surplus of petroleum.

After 2000, several developments in the Middle East may again produce more significant rises in LPG production.

Saudi Arabia will expand its Master Gas System by 2005. This expansion should allow for some increase in LPG production, but several factors could reduce ethane and LPG-recovery levels.

• Iran will gradually increase its LPG production with the addition of new gas-processing capacity and higher offshore gas production and processing rates.
• Iraq should emerge as a major LPG producer and exporter during the period. The timing remains unclear, however, until the lifting of UN sanctions occurs. Following the removal of sanctions, some time will likely be required before LPG-export facilities can be restored to the capacity that existed before the Gulf War.
• LPG production in Qatar will also rise significantly by 2005 as new gas production and processing facilities are added.

Total LPG supplies in the Middle East will rise by about 35% 1997-2005. Most of the increase will occur after 2000, however, and a significant rise in use of LPG as petrochemical feedstock will reduce the impact on increased export availabilities.

LPG production in the FSU, off significantly since the mid-1980s, has recently started to recover. This process should continue through 2005 with LPG production rising by almost 90% 1997-2005.

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

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

North Sea LPG supplies have increased by almost 90% since 1990 and will continue to rise. 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

Historically, the Middle East dominates the international export market for LPG. Together with Africa, these two regions accounted for an estimated 30 million metric tons of net waterborne exports in 1997 (Fig. 3 [39,056 bytes)].

Exports from the Middle East appear to be declining at least through 2000, owing to the relatively flat growth outlook for LPG production and the significant buildup in LPG-based petrochemical projects in the region.

Net export availabilities from the Middle East should decline from around 25 million mty in 1997 to about 23 million mty in 2000. This decline should result in a continuation of the relatively tight supply/demand balance observed in the East-of-Suez market over most of the past several years.

Beyond 2000, net exports from the Middle East should begin to rise again, but many circumstances could alter this outlook. If LPG exports from Iraq do not occur during this time frame, for example, the East-of-Suez market might be even tighter than anticipated.

Exports from Africa will continue to rise 1997-2005 as supply expansions significantly outpace regional demand growth. Net African LPG exports will approximately double over the next 8 years and reach about 9 million mty in 2005.

This development is just part of the dramatic rise in LPG export availabilities anticipated in the Atlantic Basin region which includes Europe, Africa, and the Americas.

A major shift in the regional LPG supply/demand is occurring in Latin America (OGJ, May 18, 1998, p. 49). Historically, this region has been a net LPG importer because of Brazilian import requirements and, to a lesser degree, several smaller markets in South America, Central America, and the Caribbean.

While LPG demand continues to expand in Latin America, development of several new large gas processing facilities is resulting in a dramatic increase in LPG supplies.

As a result, the LPG market in the region is quickly shifting from being short of LPG supplies to having a surplus.

By 2005, net LPG exports from Latin America could exceed 5 million tons. This outlook stands in sharp contrast to 1997 when the region was a net importer of more than 3 million metric tons.

This shift should result in increased movements from Latin America to North America and could result in movements to other markets, particularly on a seasonal basis.

U.S. picture

The U.S. is the world's largest single market for NGL, accounting for nearly 24% of total global demand. A highly integrated infrastructure which permits movement of NGL from production to centralized fractionation and storage facilities and then to end-use consumers is largely responsible for the size and complexity of the U.S. market.

Natural gas

The early 1980s were a depressed time for natural gas, a condition stemming from price controls and regulations limiting uses for natural gas. Since the mid-1980s, production of natural gas has been slowly rising and will likely continue rising through 2005 at 1.5%/year.

Most natural gas produced in the U.S. is nonassociated. Although less associated gas is produced, it is nonetheless important to production of NGL because this gas typically has a much higher NGL content.

Much of the expected increase in natural-gas production in the late 1990s and the following decade will come from rising production in the Gulf of Mexico offshore Louisiana.

Since the mid-1980s, Texas has been the top gas-producing state in the nation. But by 2005, Louisiana will surpass Texas.

Natural-gas production cannot increase without an adequate market for the gas. Industrial consumption of gas will grow at nearly 1.6%/year. The market which shows the greatest promise for growth is power generation, which should rise at 2.7%/year. The residential gas market will expand but more slowly than in the past.

The U.S. natural-gas industry survived deregulation to become, in many opinions, stronger than it was previously. Total gas demand in the Lower 48 states is expected to increase at about 1.5%/year. Despite rising imports, gas production will also grow at about the same rate.

An important aspect of U.S. domestic production is that increasingly more production will be nonassociated gas. With this leaner content, NGL content will, on average, slowly decline over time.

NGL supply

Production by natural-gas processing plants accounts for about 73% of total U.S. NGL production and essentially all ethane and natural gasoline produced in the country. Merchant isomerization units are an important supply source of isobutane and correspondingly are a large consumer of normal butane.

Purvin & Gertz expects that natural-gas processing plant production of natural gasoline, isobutane, normal butane, and propane production will all slowly increase at 1.0-1.7%/year (Fig.4 [38,362 bytes]).

Natural-gasoline production will increase at the slowest rate because of the relatively lower fraction of associated-gas production. Ethane production, however, will grow more rapidly at 2.7%/year because of increased extraction efficiency from natural-gas plants.

By 2005, domestic production of NGL in the U.S. will reach nearly 2.2 million b/d.

The outlook is encouraging for continued growth in NGL production by gas plants in the U.S. Proven reserves of NGL reported by the U.S. Department of Energy's Energy Information Agency (EIA) increased in 1995 and 1996. These increases reversed the downward 6-year trend that began in 1989.

Because of the rapid increase in gas production in Louisiana, NGL production from gas plants there should also rise very quickly: total NGL production in Louisiana will grow quickly at about 5%/year. By 2005, total NGL production in Louisiana will surpass 450,000 b/d, compared with only 300,000 b/d in 1998.

One component that remains something of an issue is ethane production in Louisiana. Large amounts of ethane are likely to be rejected from gas plants during the next few years because of limited market growth in Louisiana.

At least one ethane-based ethylene plant, however, will be constructed in Louisiana along the Mississippi River after 2000. Therefore, as ethane demand increases, less ethane will be rejected, and ethane production will jump sharply.

Fig. 5 [35,401 bytes] shows Purvin & Gertz' outlook for NGL production by refineries which in the U.S. are a substantial supply source of propane and also supply significant volumes of normal butane.

Very little isobutane and ethane are recovered from refineries in the U.S. Slightly more normal butane is produced, mostly as a result of reduced volatility limits for gasoline which were instituted in the late 1980s.

As shown in Fig. 5, only about 20,000-30,000 b/d of normal butane were generated in the early 1980s by U.S. refineries. Annualized refinery net production will likely stabilize at about 100,000 b/d but will remain extremely seasonal.

Propane production by U.S. refineries has increased steadily since the mid-1980s and will continue to increase over time. Three factors contribute to this outlook for rising propane production from refineries.

• Gasoline production will continue to increase over time, and more propane will therefore be produced.
• As a result of production of reformulated gasoline, operating severities of many refinery units will increase and generate more propane.
• As a result of increasing the value of propylene, more propane/propylene mix will be recovered and sold into the chemicals market.

As the final component of NGL supplies in the U.S., imports of normal butane, isobutane, and natural gasoline will remain fairly constant until 2000. Slightly fewer normal-butane imports, however, will then be required as a result of Phase II gasoline reformulation which will further reduce U.S. demand for normal butane.

Ethane currently flows into the U.S. from Canada in the Cochin Pipeline. In 1999, the partners operating the pipeline will have less incentive to ship ethane when an ethane-marketing joint venture ends.

Beginning in about 2000-2001, however, the Alliance Pipeline may begin to ship ethane as a mixture in the natural gas being exported to the U.S. Purvin & Gertz does not show these volumes as ethane imports because they would be recovered from the natural gas in a straddle plant to be located in the U.S.

Propane will be the most dynamic market for NGL imports as a result of the increased need for NGL feedstocks for the production of ethylene. The U.S. will not be forced to buy propane at a premium price, however.

Rather, that propane will be relatively abundant in the Atlantic Basin area from a wide variety of sources including the North Sea, Algeria, the Congo, Nigeria, Venezuela, and U.S. Gulf Coast.

Therefore, Purvin & Gertz believes propane will be available to the U.S. at a relatively attractive price.

NGL demand

Purvin & Gertz expects that NGL demand in the residential and commercial sector will grow at only 1.1%/year (Fig. 6 [37,779 bytes]). Although this sector has historically been the largest consumer of propane, within the next 1-2 years propane use by ethylene plants may become the largest end-use sector.

Refinery demand for NGL, mostly normal butane and isobutane, will remain nearly unchanged. The shift in 1998 to the EPA's Complex Model for calculating automobile emissions should have only a minor effect on refinery demand for NGL.

When Phase II of the gasoline-reformulation program goes into effect in 2000, demand for isobutane will increase, but refinery demand for normal butane will decline.

The major growth market for NGL is going to be for the production of chemicals. The category "Other Chemicals" includes items such as maleic anhydride, propylene oxide, and MTBE. NGL demand to produce these chemicals will grow at a strong 1.6%/year.

The most dynamic market for NGL in the U.S., however, is going to be for the production of ethylene. By 2005, ethylene-feedstock demand for NGL will rise to nearly 1.7 million b/d vs. about 1.3 million b/d in 1998.

Both propane and ethane demand as ethylene plant feedstocks will increase steadily through 2005. The major factor behind this growth is the U.S. ethylene industry's continuing to build NGL-based crackers through 2005.

NGL-based crackers will provide a higher rate of return than naphtha-based crackers because of their lower capital costs. Therefore, Purvin & Gertz believes that, as long as the ethylene industry believes that adequate supplies of NGL will be available, it will continued to build NGL-based units.

The Authors