World LPG production poised to surge; ethane will grow in Middle East

While the overall growth for LPG since 1995 has averaged 2.8%/year, growth rates in individual geographic regions have varied significantly, with the highest growth in developing regions of the world. In the more mature economies of Western Europe and North America, LPG demand has grown much more slowly overall.

The highest growths continued to be in the Middle East, Far East, Southeast Asia, and the Indian subcontinent. Much of this demand growth has resulted from pressure in the residential-commercial sector. The demand growth in the Middle East has primarily resulted from the petrochemical sector’s expansion in this region.

Asia, Oceania

Overtaking North America, Asia has become the largest LPG consuming region in the world.

Total demand there in 2004 was slightly more than 64 million tonnes. In comparison, the North American market in 2004 was 59.4 million tonnes. In Asia, LPG demand has increased by 4%/year since 1995. More than 68% of total demand in the region is for use in the residential-commercial sector.

Within the region, Japan and China are the largest consumers. Japan had base demand of 18.2 million tonnes in 2004, while China was very close at 18.1 million tonnes. The growth in Chinese demand for LPG over the past several years has been very strong, and growth rates in the past 10 years have averaged more than 13%/year. During the same time, Japanese consumption has declined -0.5%/year.

For the future, Purvin & Gertz expects Chinese demand growth to continue but not at the levels exhibited in recent history. Japanese demand will remain flat to slightly negative. Thus, the Chinese consumption of LPG should exceed that of Japan in 2005 and remain larger in the future.

In comparison with the Far East, Southeast Asian LPG markets are much smaller. Some of the markets, nevertheless, have also exhibited strong growth rates and are becoming more important regional players in the LPG trade.

The region has experienced total LPG demand growth of slightly less than 7%/year since 1995. Total LPG demand in the region grew to 8.3 million tonnes/year (tpy) in 2004 from 4.7 million tpy in 1995.

Much of the demand in the region centers in Malaysia and Thailand, both of which have mature LPG markets with high penetration in the residential-commercial markets. Together, these two countries represent 60% of the total demand in the region.

Most countries in the region, with the notable exception of Singapore, have exhibited reasonable to high growth rates in the last 10 years. Much of the regional consumption, more than 70%, is in the residential-commercial sector. Purvin & Gertz expects that growth in this sector will continue through the rest of the decade and that growth will be more than 5%/year through 2010. Vietnam will exhibit the highest growth rates of any of the countries in the region during this time.

The LPG markets in the Indian subcontinent have continued to exhibit strong growth rates. From 1995 through 2004, total demand rose to 10.2 million tonnes from 4.2 million tpy. This represents growth of more than 10%/year. Almost all of this demand originates in India, which accounts for more than 90% of the total consumption on the subcontinent.

As stated previously, almost all of the regional demand is due to consumption in the residential-commercial sector. This region includes more than 3.5 billion people, or almost 56% of the world’s population. We expect that economic growth in this region will continue and will force additional consumption of LPG, although at a slower pace than over the last 10 years. Per-capita consumption of LPG in these countries will increase quite strongly between 2005 and 2010.

Nearby Oceania is the consuming region with the lowest overall demand at 2.1 million tonnes.

Australia dominated the regional market with total consumption of 1.9 million tonnes. One unique aspect of the Australian market is the use of LPG as auto fuel, an end-use sector that accounts for almost 65% of the total use in the country. Purvin & Gertz expects that total regional demand will grow to about 2.4 million tonnes in 2010, with Australia continuing to dominate the regional consumption.

Latin America; Middle East

Latin America continues to be another large market for LPG and, since 1995, has exhibited strong growth in LPG markets.

Demand in the region has grown by 5 million tonnes since 1995. Within the region, 80% of the LPG is consumed in the residential-commercial sector. Demand in the region contracted in 2002 and 2003 but returned to growth in 2004. The contraction in demand was notable in Brazil and Mexico and due to a combination of economic factors and natural gas penetration.

Mexico continues to have the highest per-capita use of LPG in the residential market of any country in the world because four out of five households in the country use LPG as their cooking fuel.

Most of the growth in regional LPG markets, then, has been driven by increases in commercial-residential use. The Middle East, however, is a notable exception to this trend; it has been heavily influenced by the petrochemical sector’s use of LPG as a feedstock.

The Middle East has historically provided much of the LPG that is exported to the Far East. This trade pattern continues today and will continue for the foreseeable future. The increase in associated-gas production in the region, however, has provided additional LPG that can be used for other purposes.

Saudi Arabia has led in the use of the LPG for chemical feedstock and currently accounts for almost half of total LPG consumption in the Middle East. In 2004, total regional demand for LPG was 15.2 million tonnes; Saudi Arabia accounted for 7.2 million tonnes. Petrochemical feedstock demand accounts for more than 75% of the total demand in that country.

Demand for LPG in Saudi Arabia will remain steady over the next several years but is likely to jump sharply beginning in 2008, as the next series of chemical manufacturing facilities is brought into production. Demand in the residential-commercial sector will remain relatively steady, with some growth, over the next several years.

Iran is the next largest consuming country in the region and accounts for slightly less than 20% of regional LPG usage. Growth in Iran has averaged slightly more than 5%/year since 1995. Petrochemical use of LPG in the country will increase dramatically after 2010, as the South Pars field is developed beyond current efforts.

For the near term, the residential-commercial sector will provide market growth of about 3%/year through the remainder of the decade.

Europe, Africa

LPG demand in Europe has increased rapidly in some countries. Due to the collapse of the former Soviet Union, many of the newly formed republics experienced severe economic downturns 1990-95. Since 1995, many of these countries have seen strong economic growth.

From 1995 to 2004, demand in many of the countries of Eastern Europe was increasing at more than 7%/year. While the demand trends were strong in percentage terms, the absolute increases in LPG volumes were less impressive, mainly because these countries were starting from low consumption bases.

In Northern Europe, the UK and Ireland are the largest consumers of LPG and currently account for almost 3 million tonnes of the regional consumption of 18.2 million tonnes. Germany is not far behind, accounting for 2.8 million tonnes. Scandinavia and Poland each accounts for around 2 million tonnes of consumption.

Northern Europe as a region has seen growth in overall LPG demand to 12.3 million tonnes in 2004 from 11.5 million tonnes in 1995.

Within the region, auto-fuel use in Poland has exhibited extremely strong growth over the past 10 years accounting for the bulk of the growth in the country’s LPG market. The auto-fuel market for LPG may be one of the highest growth sectors for the industry over the next 10 years in this region; however, this may vary widely from country to country within the region.

In southern or Mediterranean Europe, growth patterns for LPG have been quite different. The regional demand has grown to 15.7 million tonnes in 2004 from 14.1 million tonnes in 1995, or an average of 1.2%/year.

The countries that make up this region include Spain, Italy, France, Turkey, Bulgaria, Romania, and the Balkan states and have a combination of mature and developing markets. The economic growth of the developing markets may drive slightly higher growth rates in the future, but these are unlikely to deviate significantly from past trends.

The FSU region has exhibited LPG demand growth of 2.7%/year since 1995. Between 1990 and 1998, demand in the region steadily declined due to weak economic conditions. In recent years, positive growth has returned to the regional markets.

In 2004, total demand was 7.3 million tonnes. Russia accounts for the largest portion of the regional demand, with the country consuming almost 80% of the LPG. Within Russia, the residential-commercial sector uses more than one-half of the total, while petrochemical consumption of LPG is also quite significant.

In Africa, LPG markets have grown rapidly in some areas, and the entire region has grown at an average 5.3%/year.

In 2004, total LPG demand was 8.3 million tpy. Almost all the consumption in the region is in the residential-commercial sector. Egypt is the largest consuming country, accounting for about one-third of regional consumption. Algeria and Morocco are also large regional consumers of LPG.

Regional demand should increase to 10.8 million tonnes by 2010.

North America

In North America, overall demand has grown at less than the world average. The North American market is one of the largest in the world, is quite mature, and relies heavily on petrochemical consumption of LPG. Demand has grown in the region at 0.8%/year since 1995.

This small growth rate, however, masks the absolute demand increase due to the large size of the market. The North American market increased by 4.2 million tonnes during this timeframe. When compared to other regions, this increase is twice the size of the overall consumption in Oceania. In recent years, Asia has surpassed North America as the largest LPG market in the world.

The North American market’s reliance on petrochemical consumption of LPG is demonstrated by the fact that more than 40% of the consumption is in this end-use sector. North America provides the worldwide LPG industry with an outlet for excess product when economics in other regions are unattractive, through the ability both to store and to consume large volumes.

The US ethylene industry is quite flexible in terms of feedstock capabilities and can switch from ethane to LPG-based feedstock. Market share of LPG as a feedstock fluctuates regularly based on relative economics.

Because North America is a very mature market, Purvin & Gertz does not expect overall demand to grow much in the region. We forecast that the market will grow at about 1.6%/year through 2010. Future growth in the region largely depends on the petrochemical feedstock market.

Recent high prices for natural gas in the region have driven up LPG prices. In 2004, the increase in crude oil prices actually helped the relative economics of the industry, but a high relative gas price/low crude price environment could damage the regional petrochemical industry.

The higher feedstock prices in North America, when compared to other regions in the world, have already hurt the region’s ability to compete in the world petrochemical markets. Further erosion of competitiveness could slow potential demand for LPG.

Global supply

Global supply of LPG rose to about 214 million tonnes in 2004 from 168 million tonnes in 1995. The supply increase over these years has averaged about 2.4%/year. Purvin & Gertz expects supplies will reach about 257 million tpy by 2010 (Fig. 2).

Changes in sources

Gas processing continues to provide the largest source of LPG supply, accounting for about 60% of total worldwide production over the last 10 years. Refineries are the other large source of LPG production, accounting for much of the remainder. Other sources account for roughly 1% of worldwide LPG production.

A growing source of LPG is that of gas processing operations associated with natural gas liquefaction for LNG export. The growth in LNG facilities around the world will likely increase LPG production from the processed gas. For some projects, LPG may be totally or partially left in the LNG stream, depending on the incoming gas quality. With many projects, however, extraction of the heavier LPG components will be necessary before liquefaction of the remaining gas stream.

Regional supply

Regional LPG production has shown some notable shifts over the last decade.

In 1990, LPG produced in regions east of the Suez Canal (“East of Suez”) produced slightly less than 30% of the world total. In 2000, East of Suez’s share of the total had risen to nearly 35%, and Purvin & Gertz estimates that more than 40% of the world’s LPG supplies will come from East of Suez by 2010.

On a percentage basis, production increases have been particularly high on the Indian subcontinent, where production rose to 7.9 million tonnes in 2004 from 3.4 million tonnes in 1995, or an average growth of 9.8%/year. In Africa, production rose to 17 million tonnes from 8 million tonnes in 1995, for an average growth of 8.7%/year. In the Far East and Southeast Asia, there were also significant increases in LPG production. If absolute production increases are compared, however, the regional rankings are slightly different.

Since 1995, LPG production has increased by 46.2 million tpy. The largest absolute production increase between 1995 and 2004 was in the Far East, where supplies increased by 10.1 million tonnes. African production increased by 9 million tonnes, while the Middle East provided an additional 6.9 million tpy of supply to world markets.

Latin America and the Indian subcontinent provided 5.5 and 4.5 million tpy, respectively.

North America actually exhibited a production decline of 400,000 tpy during this time and was the only region to exhibit such a downturn. This is only a very small percentage of the overall supply for the region, however. Production in North America will actually grow over the next several years.

The increase in the Far East was driven largely by increased production from refineries in Korea and China. All of the production in the region comes from refineries, as there is no appreciable gas processing. In the future, Purvin & Gertz expects refinery production of LPG will increase, especially in China, where new refineries and expansions are planned to accommodate the growing Chinese economy and growing demand for transportation fuels.

• In Africa, most of the LPG production increase was attributable to Algeria, due to production increasing to 10.3 million tpy in 2004 from 5 million tonnes in 1995. Purvin & Gertz expects production growth to slow from this pace over the next several years, but growth rates will stay positive.

Due to the large growth in Algerian production, coupled with increased petrochemical consumption of LPG in Saudi Arabia, Algeria is challenging Saudi Arabia as the world’s largest exporter of LPG.

Nigerian production of LPG has also increased significantly since 1995, due to an increase in crude oil production and a significant increase in gas processing capacity. Previously, a large portion of Nigerian gas production, along with the entrained LPG, was flared. This practice has been decreasing, and the gas is processed for the entrained liquids.

Additions to LNG liquefaction capacity have also increased the overall recovery of LPG from the produced gas. The Nigerian government has been a strong proponent of reducing gas flaring and monetizing the gas resources in the country. We expect that Nigerian LPG production will increase to 6.6 million tonnes by 2010.

• The Middle East is another region with strong growth in LPG production since 1995. Major contributors to this production include Iran, the UAE, and Qatar. The largest increase in production came from the gas processing industry in the region.

Over the next several years, LPG production will grow in Saudi Arabia, Iran, Qatar, and the UAE. All of these countries continue to develop existing and new gas reserves. The continued growth in worldwide demand for LNG will also drive the expansion of gas processing, and LPG recovery will factor into these additional projects.

• Latin American LPG production was 24.0 million tonnes in 2004. This was behind the Middle East and North America but larger than total production in the Far East. Mexico, Brazil, Venezuela, and Argentina are significant producers in the region. Gas processing in the region accounts for more than 60% of LPG production; this will grow in the future.

Several different countries in the region will contribute to the expected growth in the future. In 2004, Peru began production from the Camisea field. There is a likelihood of additional gas processing in the future as expansions of production capacity occur.

Several countries in the region have plans for new and expanded gas liquefaction facilities, which will add to the regional LPG supply. Purvin & Gertz expects total LPG production in the region will reach 28.6 million tonnes by 2010.

• The Indian subcontinent has had strong growth in LPG supplies since 1995. Much of the growth has been due to additional crude oil refining capacity that was added in the late 1990s. More than two-thirds of regional LPG production comes from refineries, a wide departure from the world average.

Total regional production was 7.9 million tonnes in 2004. India dominates the region, with more than 90% of production. By 2010, we expect that regional production will increase to 9.8 million tpy.

• Gas processing capacity in Southeast Asia has increased since 1995, adding LPG production to regional supplies. Refinery production in several countries in the region has also added to LPG production. The largest sources of supply in the region are Indonesia, Thailand, and Malaysia.

Indonesia has struggled to maintain LPG production at historic levels, due mainly to declining gas production at Bontang and Arun. The Arun LNG plant was shut down by civil unrest in the area and LPG exports from Arun were discontinued several years ago. Gas volumes at Bontang continue to decline. While additional LNG projects are under way, the natural gas feeding some of the newer projects is relatively dry and not expected to yield much LPG.

Purvin & Gertz expects that regional LPG production will increase by 2.7 million tonnes between 2004 and 2010. This assumes some growth in gas processing in the region. Also, there are plans for a grassroots refinery in Vietnam, but this project is unlikely to add significant LPG volumes until at least 2009.

Nearby Oceania posted a slight increase in LPG supplies since 1995, going to 3.9 million tpy from 2.7 million tpy. This is a 44% increase during this time, representing reasonable production growth, even though the absolute volumes are small in comparison to overall worldwide supply.

• Western Europe is a large, mature producing region. Supplies there have grown less than 1%/year since 1995. Production from the North Sea represents a significant portion of regional production, even though refinery supplies contribute more heavily than gas processing to LPG supplies.

We expect that growth will occur in regional supplies, but it will remain much lower than in other producing regions around the world. Increased refinery supplies of LPG will help offset declining North Sea supplies.

In 2004, the FSU produced 9.6 million tonnes of LPG, an increase from the 1995 production level of 5.9 million tonnes. This volume growth occurred as a result of additional gas processing activity in several countries, but overall, refineries in the region had a higher growth rate for increases in LPG production.

• North America continues to be a very large supplier of LPG, even though Asia has surpassed it in terms of overall consumption. We do not expect North America to lose its dominant position on the supply side in the foreseeable future.

Production growth since 1995 has been very low in comparison to many other regions but will likely remain positive through 2010. Production in the last several years has been volatile due to poor gas processing margins.

LNG projects

Future LPG production around the world is being greatly affected by the additional natural gas liquefaction projects. New projects and expansions have been announced or planned for Qatar, Nigeria, Angola, Indonesia, Russia, Norway, and several other countries. These projects, depending on timing and whether they are built, may add a large increment of LPG supply to the world markets over the next 5 years.

The most notable projects are in Qatar, with the development of several new LNG trains associated with the North field, the world’s largest non-associated gas field. Recoverable reserves in the field are estimated as high as 900 tcf of natural gas, representing 20% of the world’s proven gas reserves. Iran also has plans to develop natural gas projects associated with the portions of the field that fall into its boundary waters.

If these projects are developed on their current timeframes, Qatar will move to export more than 6 million tonnes of LPG by 2010 from fewer than 2 million tpy currently. By 2015, production could increase by an additional 3-5 million tpy.

Expansion of the LNG industry in Nigeria will increase LPG production from this coastal African country. Total LPG supply from the country will more than double between 2004 and 2010, driven primarily by new LNG projects.

LPG supply from Iran will increase by more than 50% from 2004 levels as the South Pars field is developed. Some of the additional LPG will be used in petrochemical projects that are being developed in conjunction with the producing and processing facilities.

Along with the additional LPG derived from natural gas liquefaction facilities around the world, more LPG production will also come from existing and new gas processing plants and refinery projects. Purvin & Gertz expects that LPG supply in 2005-10 will expand more rapidly than in the first half of the decade.

With all of the increases in production capacity, Purvin & Gertz expects world LPG supply to reach 257 million tonnes by 2010, up from the 2004 production of 214 million tonnes.

Trade patterns

In the late 1990s, an interesting shift occurred in global LPG trade patterns. Between 1995 and 2004, East of Suez demand increased by almost 30 million tpy. During this same time, West of Suez demand increased by almost 13 million tpy.

With this shift, the LPG supply-demand balance East of Suez has moved from a surplus of supplies to a deficit, whereas West of Suez has experienced an equal but opposite move in its balance (Fig. 3).

These relative changes in the supply and demand balances have affected world LPG trade patterns. The Far East continues to be the largest importing region in the world, and in recent years imports have been required from increasingly diverse sources to meet the demand needs of the region.

This shift has been exacerbated by additional consumption of LPG in some of the largest exporting regions, changing the quantity to LPG available to meet Far East demand. As a result, imports into the Far East have come from West and North Africa, and even some shipments from the North Sea have gone to the Far East.

With these changes, the US has continued to be a swing destination for or supplier to the global market. The US has a large capacity to store LPG during times of excess supply around the world and can also supply LPG from storage to other regions when supplies are tight. The US petrochemical industry also has a high capacity for consumption of product under the appropriate economic conditions.

Our analysis indicates that the increase in global LPG supplies will outpace the increase in base demand over the next several years. Therefore, discretionary consumption of LPG as a feedstock for petrochemical production (price-sensitive demand) will need to increase. We estimate that price-sensitive demand will increase almost 50% by the end of the decade from current levels.

Regional ethane markets

Ethane is seldom transported in ships from one region to another due to the high costs of shipping cryogenic products. Despite that difficulty, ethane is an extremely important component of the global petrochemical industry.

Nearly all ethane is extracted from natural gas. Its physical properties are relatively similar to methane, which is the main component of natural gas. Therefore, ethane can either be left in the gas or it can be extracted.

Whether to recover ethane generally depends on the economics of extracting it from the produced natural gas. If ethane is to be recovered, its price must be higher than the extraction and purification costs, including its gas-based heating value.

In 2004, ethane was used to produce about 28 million tonnes of ethylene, or about 27% of the 103 million tonnes of ethylene produced around the world during the year. About 35 million tpy of ethane were consumed to produce this ethylene. Despite this very large market, ethane use is extensive in only a few regions of the world, primarily the Middle East and North America.

The largest regional use of ethane occurs in the US and Canada, which account for about 20 million tpy or about 57% of all the ethane consumed in the world. In the US, ethane supplies are adequate to cover industry needs, as significant amounts of ethane are still not recovered from natural gas that has been processed.

The Canadian petrochemical industry uses ethane extensively in western Canada, while the eastern Canadian industry uses a wider variety of feedstocks. In Western Canada, ethane production has declined, and propane has been used to supplement the declining ethane production. Longer term, additional gas supplies from the Mackenzie Delta and-or Alaska, may supplement WCSB supplies for ethane extraction.

During the last few years, Latin America (including Mexico) consumed slightly more than 1.2 million tpy of ethane. Similarly, ethane consumption in Western Europe averaged roughly 2.4 million tpy during the last few years.

Lastly, the only other region of any significance to the global ethane market is the Middle East where consumption has grown as new olefins plants were added.

Ethane consumption for petrochemical production will continue to rise as additional ethane is extracted from natural gas. In 2005, Purvin & Gertz expects ethane feedstock consumption should be more than 35 million tonnes, and this could rise to more than 50 million tonnes by 2010.

Much of the expected increase in consumption of ethane will occur in the Middle East as additional ethylene production facilities are constructed and brought on-line. ✦

The authors

Ajey Chandra (achandra@ purvingertz.com) is a senior principal in the Houston office of Purvin & Gertz Inc. After 12 years with Amoco Corp., he joined Purvin & Gertz in 1998, was elected a principal in 2000, and a senior principal in 2004. He holds a BS in chemical engineering from Texas A&M University and an MBA from the University of Houston. He is a member of the Gas Processors Association and the Society of Petroleum Engineers and is a registered professional engineer in Texas.

Ronald L. Gist (rlgist@ purvingertz.com) is a senior principal in the Houston office of Purvin & Gertz Inc., having joined 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 currently chairs GPA’s market information committee.

Ken W. Otto (kwotto@ purvingertz.com) is a senior vice-president and director in the Houston office of Purvin & Gertz Inc. 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 (1977) in chemical engineering from the University of Texas at Austin.

S. Craig Whitley (scwhitley @purvingertz.com) 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 Economists, and the National Propane Gas Association.