US OLEFINS—FIRST-HALF 2008: High ethane demand tightens coproduct propylene supply

July 7, 2008
An increase in ethane cracking contributed to reduced coproduct propylene supply during first-quarter 2008.

An increase in ethane cracking contributed to reduced coproduct propylene supply during first-quarter 2008. Because gas-plant ethane production will likely continue to increase during second and third-quarter 2008, ethane cracking will remain strong and may set additional records. Concurrently, however, coproduct propylene supply will remain tight.

The trend toward a lighter feed slate persisted during first-quarter 2008 and into May. Feedstock demand for ethane reached a new record high of 847,000 b/d in December 2007 and averaged 800,000-820,000 b/d in first-quarter 2008, although two large ethylene plants with significant ethane demand were out of service for turnarounds in February and March.

Despite the minor slump in total ethane demand during first-quarter 2008, ethane’s share of fresh feed in multifeed crackers reached a record high of 34.5% in March 2008. Furthermore, ethane’s share of total fresh feed for all ethylene plants averaged 50.3% in first-quarter 2008 and reached 52.3% in March.

Olefin plant feed slates

Ethylene industry demand for fresh feed averaged 1.68 million b/d in fourth-quarter 2007; demand was slightly lower in first-quarter 2008 at an average of 1.61 million b/d. Demand for LPG feedstocks (ethane, propane, and normal butane) averaged 1.16 million b/d in fourth-quarter 2007 and fell to 1.13 million b/d in first-quarter 2008.

Due to the decline in LPG demand, ethylene producers cracked a somewhat heavier feed slate in fourth-quarter 2007, but the feed slate shifted lighter during first-quarter 2008. Specifically, LPG feeds accounted for 70% of total fresh feed in first-quarter 2008 vs. 69% of fresh feed in fourth-quarter 2007.

Demand for propane and normal butane typically rebound during first quarter. Propane demand, however, remained nearly constant during first-quarter 2008 vs. fourth-quarter 2007 and demand for normal butane was unusually weak.

In contrast, demand for ethane remained robust during fourth-quarter 2007 and first-quarter 2008. Specifically, ethane’s share of total fresh feed increased to 50.3% during first-quarter 2008 vs. 49.5% during fourth-quarter 2007 and 47.4% during third-quarter 2007. Demand for ethane set record highs on a volumetric basis in December 2007 (847,000 b/d) and on a share of fresh feed basis in March 2008 (52.3%).

Table 1 shows trends in olefin plants’ fresh feed slates.

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Based on projected ethylene industry operating rates of 85-88% for second and third-quarter 2008, total demand for fresh feedstocks will average 1.55-1.65 million b/d. Total demand for LPG feedstocks will average 1.15-1.20 million b/d during first-quarter 2008 and will increase to 1.20-1.25 million b/d during second-quarter 2008.

LPG feedstocks will account for 75-78% of total fresh feed during second and third quarters 2008. Demand for ethane will remain strong and ethane’s share of fresh feed will average 50-53% during second and third quarters 2008.

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Fig. 1 shows historic trends for ethylene feed slates.

Ethylene production

Ethylene production from fresh feed totaled 13.66 billion lb in fourth-quarter 2007 but declined to 12.97 billion lb in first-quarter 2008 (Table 2). Ethylene production from steam crackers during fourth-quarter 2007 was 39 million lb less than in third-quarter 2007 (less than half a day’s output).

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Production in first-quarter 2008 was 695 million lb less than in fourth-quarter 2007 (about 5 days of production). A series of turnarounds contributed to reduced production in first-quarter 2008, but ethylene producers also reduced operating rates in multifeed crackers due to unfavorable economics for naphthas, condensates, and gas oils.

Production from LPG plants totaled 4.95 billion lb in fourth-quarter 2007 and 4.85 billion lb in first-quarter 2008. Production in first-quarter 2008 was 100 million lb less than in fourth-quarter 2007 (about 2 days of production).

Production from multifeed crackers totaled 8.71 billion lb in fourth-quarter 2007 but declined to 8.11 billion lb in first-quarter 2008. Production from multifeed crackers during fourth-quarter 2007 was 590-600 million lb less than during fourth-quarter 2007 (about 6 days of production).

Operating rates for LPG crackers averaged 91% of nameplate capacity (21.6 billion lb/year) during fourth-quarter 2007 and averaged 90% during first-quarter 2008. Multifeed crackers operated at 87% of nameplate capacity (39.2 billion lb/year) during fourth-quarter 2007 and at 81% during first-quarter 2008.

Operating rates for industry overall averaged 88.0% during fourth-quarter 2007 but slipped to 84.6% during first-quarter 2008. Multifeed crackers accounted for 75-80% of all capacity that experienced downtime during first-quarter 2008 for reasons other than turnarounds. Production curtailments in multifeed crackers were reasonable in response to the deteriorating profit margins for naphthas, condensates, and gas oils.

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Fig. 2 shows trends in ethylene production.

US propylene production

Propylene from steam crackers totaled 3.08 billion lb in fourth-quarter 2007, which was 55 million lb less than in third-quarter 2007 (less 2 days of production). Coproduct propylene production during fourth-quarter 2007, however, was 122 million pounds less than year-earlier volumes (4 days of production). Propylene production declined again in first-quarter 2008 and totaled only 2.85 billion lb—233 million lb less than in fourth-quarter 2007 (about 7 days of production).

Propylene production from LPG feeds totaled 1.10 billion lb in fourth-quarter 2007 and was nearly 300 million lb less than production in third-quarter 2007. Propylene from LPG feeds was also 180 million lb less than year-earlier volumes. Propylene production from LPG feeds declined in first-quarter 2008 and totaled only 1.04 billion lb—59 million lb less than in fourth-quarter 2007.

During fourth-quarter 2007 and first-quarter 2008, ethane cracking remained strong while propane and normal-butane cracking remained at seasonal minimum levels. The sustained strength in feedstock demand for ethane was the most significant factor resulting in the 20% decline in coproduct propylene yields from LPG feeds during fourth-quarter 2007.

Propylene production from naphthas, condensates, and gas oils was 1.99 billion lb in fourth-quarter 2007, which was 233 million lb more than during third-quarter 2007. Coproduct yields of propylene from heavy feeds declined to 1.81 billion lb during first-quarter 2008, which was 175 million pounds less than fourth-quarter 2007.

Ethylene producers will continue to maximize their use of ethane during second and third quarters 2008. Furthermore, multifeed crackers will likely continue to operate at reduced rates. Coproduct yields of propylene will therefore continue to average 0.85-0.95 billion lb/month.

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Table 3 shows trends in coproduct propylene production from LPG and multifeed plants.

Refinery propylene supply

Normally, refinery propylene production reaches an annual peak during third quarter and declines in fourth and first quarters. Refinery-grade propylene production during third-quarter 2007, however, was less than expected levels and averaged 41.4 million lb/day.

Refinery propylene sales increased to 3.97 billion lb in fourth-quarter 2007 and averaged 43.1 million lb/day (Table 4). Production was 156 million lb more than third-quarter 2007 (about 4 days of production), but was 229 million pounds less than year-earlier volumes (about 5 days of production).

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As expected, refinery propylene sales declined during first-quarter 2008 and totaled 3.76 billion lb, which was 41.8 million lb/day. Production in first-quarter 2008 was 200 million lb less than in fourth-quarter 2007, but was only 54 million lb less than year-earlier volumes. Refinery propylene sales in first-quarter 2008 were about 100 million lb more than discussed in an earlier article (OGJ, Feb. 4, 2008, p. 56).

Domestic propylene production was 7.01 billion lb in fourth-quarter 2007 and was 101 million lb more than in third-quarter 2007. Domestic production declined in first-quarter 2008 and totaled only 6.56 billion lb, which was 347 million lb less than year-earlier volumes. The year-to-year decline in domestic propylene production began in second-quarter 2007 and persisted for 4 consecutive quarters.

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Fig. 3 shows trends in coproduct and refinery merchant propylene sales.

Ethylene economics, prices

Feedstock prices, coproduct values, and ethylene plant yields determine ethylene production costs. Petral Worldwide maintains direct contact with the olefin industry and track historic trends in spot prices for ethylene and propylene. We use a variety of sources to track trends in feedstock prices.

Some ethylene plants have the necessary process units to convert all coproducts into high-purity streams. Some ethylene plants, however, do not have the capability to upgrade mixed or crude streams of various coproducts and sell some or all their coproducts at discounted prices. We evaluate ethylene production costs in this article based on all coproducts valued at spot prices.

Ethylene production costs

Production costs for ethylene in the Houston Ship Channel (based on full spot prices for all coproducts) declined to 41-42¢/lb in March 2008 for ethane and normal butane from 47-48¢/lb in January 2008. Production costs for propane also declined during January-March 2008 (44¢/lb in March vs. 48¢/lb in January). Production costs for natural gasoline, however, increased 3.5-4.0¢/lb and averaged 55-56¢/lb in March vs. 51-52¢/lb in January.

Production costs for natural gasoline were only 4¢/lb more than ethane in January but were 13-14¢/lb higher than ethane in March. In response to these economic incentives, ethylene producers maintained an ethane-rich feed slate during first-quarter 2008.

Ethane’s share of fresh feed to LPG crackers was a record high 81% during first-quarter 2008. Similarly, ethane’s share of fresh feed to multifeed crackers was a record high 33.9% for first-quarter 2008 and reached 35.4% in March.

During the first few days of February, spot prices for ethane collapsed. During the first 2 weeks of January, ethane prices in Mont Belvieu averaged 114-115¢/gal. By the end of the first week of February, purity ethane prices fell to 91-92¢/gal, a level 20% lower than in early January.

Spot prices for propane and natural gasoline declined 15.8% and 14.3%, respectively, during mid-January through mid-February. More significantly, however, spot prices for natural gasoline increased 15.5¢/gal (10.8%) during mid-February through mid-March; purity ethane prices were steady at 94-96¢/gal.

Gas-plant ethane production in the Rocky Mountains began to increase in September-October 2007 and many feedstock buyers and gas processors anticipated additional production growth. Furthermore, a series of ethylene plants started turnarounds in February and March 2008.

The anticipation of greater ethane production and the temporary but minor slump in demand tipped the ethane market into a modest surplus during February and March. Finally, feedstock buyers and ethane producers seemed remarkably reluctant to accumulate any inventory during the various plant turnarounds. The shift in perceptions regarding ethane supply and pricing had an unexpected bearish effect on ethane prices during February through mid-May.

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Table 5 shows trends in ethylene production costs.

Ethylene prices, profit margins

Contract prices for ethylene averaged 60.2¢/lb in fourth-quarter 2007, which were 10¢/lb higher than in third-quarter 2007.

During fourth-quarter 2007, contract prices increased to 57.5¢/lb in October and 61.5¢/lb in November and December, up from 52.5¢/lb in September. Contract prices were nearly unchanged in first-quarter 2008 and averaged 60.5¢/lb.

Margins based on purity ethane increased in fourth-quarter 2007 and averaged 15.7¢/lb, which were 1¢/lb more than in third quarter. Margins based on natural gasoline, however, declined in fourth-quarter 2007 and averaged 10.8¢/lb or 3.1¢/lb less than in third quarter.

Margins based on purity ethane were slightly lower in first-quarter 2008 and averaged 14.5¢/lb, which were 1.2¢/lb less than in fourth-quarter 2007. Margins based on natural gasoline, however, collapsed in first-quarter 2008 and averaged 3.9¢/lb—6.9¢/lb less than in fourth-quarter 2007.

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During fourth-quarter 2007, spot prices for ethylene fluctuated within a tight range of 50-52¢/lb and averaged 51.2¢/lb, which was 5.2¢/lb more than in third quarter and 12.3¢/lb more than in second-quarter 2007. The increase in spot ethylene prices during fourth-quarter 2007, however, did not keep pace with rising variable production costs. Instead, margins based on spot prices and variable production costs narrowed to 8-13¢/lb during the fourth quarter for purity ethane.

Margins based on natural gasoline and similar light naphthas collapsed to 3¢/lb in December from 12¢/lb in October 2007.

Spot prices for ethylene averaged 51.6¢/lb in first-quarter 2008, but fluctuated within a range of 47-55¢/lb. Margins based on variable production costs for ethane averaged 11¢/lb in first-quarter 2008 and jumped to 16-17¢/lb in March, up from 8-10¢/lb in January and February.

The squeeze on margins for light naphthas and natural gasoline got measurably worse during first-quarter 2008. Margins were slightly below breakeven in January, but these feedstocks generated losses of 2-6¢/lb in February and March.

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Figs. 4 and 5 show historic trends in ethylene prices (spot and net transaction prices) and profit margins based on composite production costs.

Octane values, propylene prices

We determine octane’s incremental value using the differential between unleaded premium and unleaded regular (ULR) gasoline prices divided by the difference in octane (87 octane for ULR gasoline and 93 octane for unleaded premium gasoline).

Octane values are a primary economic influence on spot prices for refinery-grade propylene and toluene. Trends in spot prices for these two products tend to influence prices for other coproducts.

Octane values rebounded during first-quarter 2008 and averaged 1.99¢/octane-gal vs. 1.80¢/octane-gal in fourth-quarter 2007. Octane values jumped to 3.0¢/octane-gal in March, up from 1.33¢/octane-gal in February. Octane values, however, slipped to less than 2¢/octane-gal during April and May and were 1.55-1.60¢/octane-gal during second-quarter 2008.

The rebound in octane values and an increase in ULR prices helped boost spot prices for alkylate by more than 20¢/gal during January-March 2008.

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Fig. 6 shows historic trends in incremental octane values on the US Gulf Coast.

Refinery, polymer-grade C3=

Prices for all grades of propylene move in tandem with each other, and differentials between grades are generally constant within a narrow range. The premium for polymer-grade propylene covers operating costs and profit margins for the various merchant propane-propylene splitters in Texas and Louisiana.

Spot prices for refinery-grade propylene averaged 54.2¢/lb during first-quarter 2008 or 0.5¢/lb less than the average for fourth-quarter 2007. Although spot prices for refinery-grade propylene were essentially flat, ULR and alkylate spot prices increased 8.6% during first-quarter 2008.

Spot prices for refinery-grade propylene jumped to 62.4¢/lb in April and 66.4¢/lb in May. Spot prices for second-quarter 2008 were an estimated 66.3¢/lb.

Contract prices for polymer-grade propylene averaged 61.2¢/lb in first-quarter 2008 and 69.7¢/lb in second quarter 2008. Pricing differentials between contract polymer-grade propylene and spot refinery-grade propylene widened to 7¢/lb during first-quarter 2008 but narrowed to 3.4¢/lb in second-quarter 2008.

In response to building bullish pressures and persistent weakness in domestic propylene production, spot prices for refinery-grade propylene jumped to an average of 66.4¢/lb in May 2008 and increased to more than 70¢/lb in early June.

Summer, fall 2008 outlook

US Energy Information Administration statistics indicate that global crude production declined to an average of 73.3 million b/d in 2007 from an average of 73.8 million b/d in 2005. Our tabulation of global oil production includes lease condensate but excludes NGLs, which are commonly included in global petroleum production statistics.

Global crude production has not declined on a year-to-year average basis since 1980-84. Furthermore, global demand declined in response to a surge in oil prices after the Iranian revolution and forced producers to curtail global crude production.

Our price forecasts for ethylene feedstocks, production costs, and ethylene and propylene prices are based on the view that crude prices will remain in a strong bullish trend. Price forecasts published in fourth-quarter 2007 were bullish, but prices exceeded our bullish expectations. Forecasts for West Texas Intermediate (WTI) crude prices of $150/bbl, $175/bbl, and even $200/bbl before yearend 2008 are now almost commonplace.

Our forecasts for ethylene production costs for second and third quarters 2008 are based on WTI prices of $125-150/bbl. Although there is increasing evidence that U.S. gasoline demand has begun to decline, demand for refined products in the developing economics continues to grow. Global competition for stagnant crude supply will remain a bullish factor for crude and petrochemical feedstock prices this year.

ULR-WTI pricing differentials were below expectations during first-quarter 2008 and the strong bounce forecast for April and May fizzled. Furthermore, slumping demand for gasoline will keep bearish pressure on ULR-WTI differentials during second and third quarters.

Rising crude prices, however, will push ULR prices on the US Gulf Coast to $3.1-3.2/gal in second-quarter 2008 and $3.3-3.5/gal in third-quarter 2008. These forecasts set the economic basis for feedstock prices including light naphthas and propane.

Spot prices for purity ethane in Mont Belvieu rebounded in late May and early June and have a significant potential to increase another 20-30¢/gal during third-quarter 2008.

Ethylene production costs (full cash costs) will be about 55-60¢/lb for purity ethane, 64-66¢/lb for propane, and 72-76¢/lb for natural gasoline in third-quarter 2008. The projected increase in production costs will push both spot and contract ethylene prices higher during third-quarter 2008.

By early June, spot ethylene prices had already reached 60¢/lb. Spot prices for ethylene will increase to 64-68¢/lb by September. Contract prices will average 72¢/lb for third-quarter 2008 and will increase to 74-75¢/lb in September.

The author

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Daniel L. Lippe ([email protected]) is president of Petral-Worldwide Inc., Houston. He founded Petral Consulting Co. in 1988 and cofounded Petral Worldwide in 1993. He has expertise in economic analysis of a broad spectrum of petroleum products including crude oil and refined products, natural gas, natural gas liquids, other ethylene feedstocks, and primary petrochemicals. Lippe began his professional career in 1974 with Diamond Shamrock Chemical Co., moved into professional consulting in 1979, and has served petroleum, midstream, and petrochemical industry clients since that time. He holds a BS (1974) in chemical engineering from Texas A&M University and an MBA (1981) from Houston Baptist University. He is an active member of the Gas Processors Association, serving on the NGL Market Information Committee and currently serving as vice-chairman of the committee.