Continued LPG demand growth changes historical trade patterns

June 26, 2000
The last 15 years have seen world LPG demand growth outpace total petroleum demand.

The last 15 years have seen world LPG demand growth outpace total petroleum demand.

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For 1985-2005, Purvin & Gertz estimates that total LPG demand growth will average over 3.5%/year, while total petroleum demand over this same period will grow approximately 1.7%/year (Fig. 1).

The increased demand for LPG, mainly from petrochemical feedstock and residential-commercial end-use sectors, will change historical trade patterns for LPG during the next several years.

Historically, the region of the world east of the Suez Canal ("East of Suez") has had a surplus of LPG and has been a net exporter of product to the region west of the canal ("West of Suez"). The high growth of LPG demand in the Far East, coupled with additional petrochemical demand in the Middle East, will make East of Suez a net importer of LPG in 2000.

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Purvin & Gertz forecasts that these trade patterns will continue until 2004-2005 when additional LPG supplies will grow sufficiently to allow East of Suez again to become a net exporter of LPG (Fig. 2).

This historic departure has come about as more LPG production in the Middle East has been used internally to satisfy growing demand, most notably for petrochemical feedstocks, and also as the Far East economies have resumed their growth, after stalling or even falling as a result of the Asian financial crises.

Shifting regional demand

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Gobal demand for LPG is approximately 200 million tonnes/year (tpy), up substantially from 1985 consumption (Fig. 3). During the 1990s, world LPG demand rose on average nearly 3.7%/year, compared to about 1.5% for total petroleum demand.

The developing economies of the world, particularly in Asia and Latin America, continue to demonstrate the most dynamic growth in LPG demand. While the Asian economics had a significant slowdown and in some cases saw negative growth rates as a result of the Asian financial crises, these economies have generally recovered and resumed LPG demand growth.

In 1985, total world LPG demand was approximately 116 million tonnes. Of this total, approximately 23% of the demand was from East of Suez. By comparison, Purvin & Gertz estimates that world LPG demand in 2005 will be near 240 million tonnes, with 36% of the demand in East of Suez.

Growth rates for world LPG demand differ significantly in the various geographical regions of the world and have changed during the past several years.

During 1990-1999, the world average growth rate for LPG demand was approximately 3.7%/year. The Middle East had the highest growth in demand during this period, nearly 8%/year. Asia and Africa both had growth rates in excess of 5%/year, while Western Europe had growth of only 2% and North America was near 3%/year.

Latin America increased its LPG demand at slightly less than 5%/year. In sharp contrast, regional demand in Eastern Europe and the former Soviet Union shrank by 5%/year, mainly from contraction of the regional economies.

In 1985, North America was the largest consuming region, with more than 40 million tonnes of total LPG demand. By 2005, Purvin & Gertz forecasts, demand for LPG in North America will increase to more than 70 million tonnes.

Total LPG demand in Asia will increase from slightly more than 20 million tonnes in 1985 to more than 65 million tonnes in 2005. During this same period, LPG demand in Western Europe will grow from 19 million tonnes to more than 30 million tonnes.

During the 1990s, the countries of Asia exhibited an average demand growth of 6% /year for LPG.

Within the region, the largest LPG demand growth was in China, which had an annual growth rate of more than 19%. The countries that comprise Southeast Asia had total LPG demand growth of more than 10% during this time, while LPG demand in India grew at near 9.5%/year.

Japan, as the most developed economy in the region, had an average annual growth rate of less than 1%, while Korea exhibited a growth rate of more than 7%.

Purvin & Gertz expects that the growth rates demonstrated during the 1990s in Asia will slow somewhat through 2005, with the exception of India and Japan.

From 1999 to 2005, LPG demand growth in India will exceed 11%/year, while demand growth in Japan will be more than 1%/year. The average growth for Asia will approach 4.5%/year.

LPG demand growth in China will decrease significantly from the recent past but at 6.5%/year will remain very healthy.

The Middle East is another region where LPG demand will grow faster than the world average. Demand 1990-1999 in the region increased by slightly less than 8%/year.

Saudi Arabia, the United Arab Emirates, and Qatar had growth rates higher than the average, due mainly to start-up of several large petrochemical projects that used LPG as a feedstock. The UAE exhibited demand growth for LPG of more than 20%/year during the 1990s. Iranian demand grew over this time by more than 5%/year.

From 1999 to 2005, demand growth in Saudi Arabia and Qatar will exceed the historical average over the 1990s, as the local petrochemical industries continue to grow significantly. Qatar will see the largest growth, more than 25%/year; demand growth in Saudi Arabia will exceed 15%/year.

The Middle East average over the forecast period will surpass 10%/year. The UAE and Iran will grow more slowly than the regional average during the next 5 years.

To supply their domestic consumption requirements, the countries of Asia have typically relied on term contracts with Middle Eastern LPG producers.

With growing demand in Asia and fewer supplies available from the Middle Eastern countries because of internal consumption of LPG, demand is being increasingly met by supplies from other sources. The growing LPG supplies from West Africa and Algeria are now filling this shortfall in Asian supply.

During 1999, several large, fully refrigerated cargoes of LPG were transported from Africa to the Far East to satisfy demand in the region. The increased reliance on new sources of LPG supplies was further demonstrated by the movement in 1999 of LPG from the North Sea to China.

Changing markets

LPG demand by end use is also changing rapidly and is one of the primary factors behind changing trade patterns.

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In 1985, half of all LPG used in East of Suez was consumed by the residential-commercial sector. The chemical end-use sector consumed only 10% of LPG, while approximately 20% was consumed by other industrial uses. The auto fuel market and "Other" uses comprised nearly 10% each (Fig. 4)

By 2005, these end use patterns should change, based on analysis conducted by Purvin & Gertz. The residential-commercial end use will grow to consume almost 60% of total LPG use. Chemical applications will also grow to nearly 15% of total LPG consumed.

The three remaining categories (Industrial, Autofuel, and Other) will consume a smaller percentage of the overall LPG use, totaling less than 25% of the LPG used East of Suez.

West of Suez has a very similar future. In 1985, approximately 40% of total LPG consumption was in the residential-commercial sector, while chemical consumption of LPG was responsible for about 25% of total consumption.

The remaining three categories together accounted for approximately 35% of total consumption, with Other the largest at approximately 20% of total consumption.

This pattern will change by 2005. Residential-commercial consumption will remain approximately 40% of the total, but demand by the chemical end-use sector will grow to approximately 33% of the total. Combined, the three remaining categories will represent approximately 25% of total LPG consumption.

These consumption patterns demonstrate that residential-commercial and chemical end uses for LPG will continue to dominate the demand picture into the new century. In fact, they will both continue to increase as a percentage of the total demand for all uses of LPG.

In 2000-2005, LPG demand for chemical production should increase to about 25% of world LPG use from approximately 20%. Residential-commercial end use should increase from slightly more than 40% of total LPG use to about 45% of total LPG use.

The industrial, autofuel, and Other use categories will continue to play a less important and shrinking part of overall LPG demand.

Growth rates for various end uses of LPG vary significantly between geographic regions of the world. For residential-commercial end use, most markets are reasonably mature. An extensive analysis by Purvin & Gertz indicates that growth rates for residential-commercial use of LPG in most areas of the world will remain in single digits.

Asia will have the highest regional growth rate in this sector at slightly more than 5% during 1999-2005. Western Europe will have a barely positive growth rate in this end use over the same period, while demand growth in most other regions will be 3-4%.

In 1999, world average consumption of LPG in the residential-commercial sector was approximately 15 kg/capita, compared with slightly more than 10 kg/capita in 1985. By 2005, Purvin & Gertz expects that world average to increase to more than 17 kg/capita.

The largest growth areas in this category will be both India and China. In 1985, 5% of total world residential-commercial LPG consumption was in these two countries. This consumption will grow to more than 20% of the world total by 2005.

East of Suez will exhibit the greatest percentage increase in residential-commercial use: The 1985 average consumption of less than 5 kg/capita will increase to almost 14 kg/capita. In 1999, this figure was approximately 10 kg/capita.

The more mature markets in West of Suez will exhibit lower percentage growth, growing to almost 24 kg/capita in 2005, from the 1998 average of approximately 23 kg/capita.

Purvin & Gertz' analysis indicates that approximately 45% of the total world residential-commercial LPG consumption of 116 million tonnes in 2005 will be East of Suez. In 1985, the region used only 26% of a 51-million-tonne market.

The chemical end-use sector will exhibit prolific growth rates, especially in the Middle East and Western Europe.

The Middle East will have growth of more than 20%/year during 1999-2005. This strong growth results mainly from the relatively small starting base of LPG consumption by the chemical sector and the rapid expansion programs that are well on their way to fruition in the next several years.

Chemical uses of LPG in Western Europe will have growth rates of nearly 10%/year over this same timeframe. Demand in North America will grow at slightly more than 5%, compared with the world average of 7% during this time. Asia, the FSU, and Latin America will see chemical-sector growth rates of 2-3%.

The chemical end-use sector for LPG East of Suez will consume approximately 20% of a 65-million-tonne market in 2005, compared with only 10% of a 23-million-tonne market for this sector in 1985.

The West of Suez chemical end-use sector will continue significantly to dwarf the East of Suez market. Growth rates East of Suez, however, are quite high compared with West of Suez. Between 1999 and 2002, the Middle East will add almost 4 billion lb of ethy lene capacity.

The Indian subcontinent, Northeast Asia, and Southeast Asia should also increase ethylene capacity significantly during this time.

The autofuel end-use category will grow strongly in several regions. LPG demand in the Middle East and Africa will grow at more than 15% during the forecast period and, in the FSU/Eastern Europe, should also exceed 5%. The other regions will exhibit growth rates of near 3% during this time.

The percentage of LPG consumed in East of Suez markets for the autofuel and industrial markets will remain relatively steady at 44% in 2005, compared to 40% in 1985. The overall world market in these segments will increase to 38 million tonnes in 2005 from 22 million tonnes in 1985. The increases in LPG demand for autofuel will be strongly driven by environmental factors.

Supplies lagging demand

World LPG supply has grown dramatically since 1985. That year, world LPG supply was approximately 114 million tonnes. Approximately 25% of this supply came from sources East of Suez. By 2005, Purvin & Gertz estimates that 37% of the total LPG production of 240 million tonnes will come from East of Suez.

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Trading patterns continue to shift due to the changing supply-demand picture. Purvin & Gertz expects world LPG supplies to grow in every region of the world and to surpass 300 million tpy before 2020 (Fig. 5).

Production increases will be particularly strong in Africa, Asia, and Latin America as new gas-processing facilities continue to be built and refinery LPG production continues to increase.

As additional LNG facilities are also constructed throughout the world, the amount of LPG from these sources will continue to increase.

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LPG production from Latin America will grow approximately 5%/year from 1999 to 2005. Middle East LPG production will grow 5.5 %/year, while supplies from Asia will increase by approximately the same (Fig. 6).

There are a number of new supply projects expected East of Suez during the next 5 years. Projects in Qatar and Saudi Arabia will add more than 2.3 million tpy to world supplies by 2003. While LPG production in the region will increase, exports will actually decrease because of increases in domestic consumption of LPG.

Oil and gas producing areas of Southeast Asia and Oceania are also expected to increase LPG production significantly before the year 2005. Incremental production of almost 1.2 million tpy of LPG is expected from the Timor Sea area, while Papua New Guinea and the Natuna Sea areas should each contribute approximately 600,000 tpy of LPG to world supplies by 2004.

Based on expected project start-ups, approximately 4.5 million tonnes of LPG will be added to world supplies from the region by 2005.

Several LPG supply projects are also expected West of Suez before 2005.

West Africa will be a prolific LPG producer as additional gas processing is brought on stream. For years, large volumes of natural gas have been flared in West Africa. New gas and liquids recovery projects being constructed will take advantage of these valuable resources and also help the environment in the region.

In Nigeria, expansion of the Escravos and Nigerian LNG projects, along with additional processing facilities at Cawthorne Channel and Funiwa-Agbami, should add 1-2 million tonnes of LPG production to the region. Most of the LPG from these projects will be aimed at the export market.

LPG supplies from Angola will also add appreciable amounts of LPG production in the region.

Algeria continues to ramp up LPG production West of Suez and will contribute an additional 2 million tpy LPG production by 2004. Total regional exports from Africa will increase from 8 million tonnes in 1999 to almost 13 million tonnes in 2005.

The North Sea will continue to be a strong exporter of LPG. In 1999, the region exported almost 8 million tonnes of LPG and should grow to near 10 million tonnes by 2005. Over half of the new production will start up by the end of 2001.

South America will continue to add LPG production and export capacity, as more than 2 million tonnes of additional LPG production are expected from Argentina, Venezuela, and Bolivia before 2005, based on firm and probable projects.

In 1999, Latin America exported slightly less than 4 million tonnes of LPG. By 2005, total LPG exports from the region will increase to almost 7 million tonnes. Venezuela will supply the largest percentage of the increase, with Argentina also playing a significant part.

The new supply sources will change the trade patterns for LPG. The Far East will remain the largest importing region in the world but will be importing LPG from increasingly diverse sources.

Imports and distributors will find themselves under ever increasing competitive pressures as historical trade patterns are disrupted.

US implications

The trade patterns that are developing as a result of the new sources of supplies and new market development will increasingly affect the more mature markets in North America, most notably the US.

In the past, because of almost unlimited storage capacity on the US Gulf Coast, the US has attracted LPG that may be surplus in other regions. The US petrochemical industry has depended on these attractively priced cargos to help balance feedstock requirements for the ethylene industry.

US imports of LPG will decrease during the next few years, as surplus quantities are not available in other regions. In the past, LPG imports have been a vital part of the supply-demand picture in the US.

In 1998, US propane inventories increased to an historical high of more than 76 million bbl as a result of large volumes of imports during the year.

Due to heavy petrochemical use of propane, these huge inventories were drawn down below average levels by early this year. In early April, US propane inventories stood at less than 22 million bbl, well below the 40-million-bbl inventory level at the same time the previous year. Canadian inventories of LPG are also below historical norms.

One very important conclusion that can be drawn from this analysis is that the US will be unable to rely on imports this year to rebuild depleted inventories.

One other factor that will heavily influence the North American LPG balances in 2000 is the additional export capacity along the US Gulf Coast. Recent expansions in export capacity have made the US Gulf Coast more significant player in the world export markets.

Expansion of the Enterprise/Idemitsu export terminal along the Houston Ship Channel has increased the ability to take advantage of arbitrage opportunities in the Atlantic Basin as they occur.

In 1998, the US imported more than 23.2 million bbl of LPG on a net basis (imports minus exports). In 1999, this figure decreased to only 4.2 million bbl, as exports from the US surged and imports were also much lower than in previous years.

The 1999 value was the lowest net import number historically. Through April, exports in 2000 have exceeded imports for the first time in more than 10 years.

Imports and exports will play an increasingly important role in US LPG supply-demand balances. While the LPG surplus in the Atlantic Basin grows over the next several years, much of this product will be used to fill the growing deficit in East of Suez markets and will be unavailable for import into the US.

Arbitrage opportunities in the Atlantic Basin will continue to occur, but opportunities for arbitrage between North America and the Far East may become more prevalent. The increasing export capacity along the US Gulf Coast will provide the means for additional product movement.

In addition, increasing Canadian natural gas production to meet the growing demand in the US will allow for the production of additional LPG. This production in Canada may be exported through West Coast facilities or be transported to the US to help balance supply-demand fundamentals.

All of these factors provide the fundamentals for a tight supply-demand balance in North America for LPG during 2000. We expect that these tight fundamentals will support prices for LPG over the short term.

The authors-

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Ajey Chandra is an associate in the Houston office of Purvin & Gertz Inc., joining the company in 1998 from Amoco Corp. He holds a BSc in chemical engineering from Texas A&M University and an MBA from the University of Houston.

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Ronald L. Gist is a principal in the Houston office of Purvin & Gertz Inc., joining the company in 1996. He began his career with E.I. DuPont de Nemours & Co. in 1971 after receiving both BS and MS degrees in chemical engineering from Colorado School of Mines. Gist is a member of the Southwest Chemical Society and is Purvin & Gertz' representative to GPA's statistical committee.

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Ken W. Otto is a vice president in the Houston office of Purvin & Gertz. He joined E.I. DuPont de Nemours & Co. in 1977, then moved to Champlin Petroleum Co. in 1979 and served 4 years at Corpus Christi Petroleum Co. Otto joined Purvin & Gertz in 1986, was elected principal of the company in 1987, senior principal in 1990, and vice president in 1997. He holds a BS in chemical engineering (1977) from the University of Texas at Austin.

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S. Craig Whitley is a senior principal in Purvin & Gertz Inc.'s Houston office. He joined the company in 1993, working in market analysis of natural gas, LPG, and NGL markets. Whitley has a BS in chemistry and zoology from Northwestern Louisiana State University, Nachitoches. He is a member of GPA, International Association of Energy Economics, National Propane Gas Association, and Purvin & Gertz' representative on GPA's international committee.

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