ASIA`S ECONOMIC DOWNTURN, which began in 1997 and showed signs of easing as 1999 began, had little direct impact on LPG demand in the region.
The slump, however, was expected to slow petrochemical production for years in economically weakened Asian countries, cutting total demand for feedstocks, including LPG.
This was the view in late 1998 of Purvin & Gertz Inc., Houston. The consulting firm said that other uses for LPG in the region would remain relatively unaffected by the weak economies, and demand should continue to expand.
As for regional supplies, within producing nations in the Middle East, rising internal demand was expected to curtail exports somewhat. Thus, the supply-demand balance would likely tighten in the region east of the Suez Canal.
West of Suez, production was expected to increase quickly in such areas as the North Sea, Algeria, Congo, Nigeria, Venezuela, and the Gulf of Mexico offshore Louisiana. Thus, the LPG market was expected to be slightly oversupplied.
In the U.S., said the consultant, NGL production from domestic natural-gas processing plants would increase at about 1.9%/year. NGL from U.S. refineries would grow at about 1.2%/year. And net imports would nearly double between 1998 and 2005.
As for U.S. NGL demand, "other" chemical feedstocks were expected to grow at a rate of 1.6%/year. Ethylene was expected to be the major growth market for NGL, with demand increasing at an average rate of about 3.8%/year.
Purvin & Gertz expected this growth to result from an increase in both base demand (an indication that the industry would 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 expanded rapidly during the 1990s (through 1998) and changed significantly, said Purvin & Gertz.
LPG consumption expanded at nearly twice the rate of world petroleum demand. In particular, LPG use in residential and commercial markets more than doubled in many developing countries.
Markets for LPG and other petroleum products opened in many countries, accelerating demand growth and creating investment opportunities in all downstream segments.
This led to an overall strengthening of global LPG pricing and the development of many new export gas-processing projects.
While the overall trend was toward a strengthening LPG market during the 1990s, variations in market conditions and pricing year to year were expected to continue. As an example, the consultant pointed out the striking contrast between the winters of 1996-97 and 1997-98.
In winter 1996-97, it seemed that most of the market pressures favored producers and traders, and LPG prices rose accordingly. Winter heating demand in North America was strong, holding inventories relatively low.
The loss of gas-processing capacity in Mexico led to unexpectedly high imports to meet domestic LPG 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 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.
Market conditions in winter 1997-98 were 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 Niño weather patterns.
In response to very high LPG prices the previous year, Chinese refinery LPG production was boosted by more than 20%. This rise in Chinese supplies cut the need for imports to less than anticipated levels. As a result, LPG imports by 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, at least over the short to medium term.
Prices for crude oil began to reflect the demand slowdown during late 1997 and remained low through 1998, further suppressing world prices for LPG.
Purvin & Gertz said long-term growth prospects remained high in most developing-world markets, and expansion in world petrochemical feedstock markets continued to be strong relative to most fuels markets.
World LPG demand
In the 1990s, about 95% of total world demand for LPG occured in end-use markets relatively insensitive to price. Examples of such end uses that Purvin & Gertz classified 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.
Markets for LPG expanded in all end-use sectors during this period. Growth was particularly strong in the residential-commercial and petrochemical sectors.
Demand for LPG was expected to remain strong in these applications, with world LPG-demand growth averaging about 3.8%/year through 2005 (Fig. 1).
Residential, commercial market
Since 1990, overall world LPG demand growth in the residential and commercial sector averaged 4.9%/year. Demand in this sector was expected to increase to about 103 million mty in 2000 and 120 million mty in 2005.
Activity in the LPG residential-commercial market, however, varies significantly in different regions of the world.
Demand growth was particularly strong in Southeast Asia during the 1990s, averaging nearly 12%/year in the residential-commercial sector. This growth slowed somewhat as a result of the Asian financial crisis.
Over the long-term, however, strong growth in this end-use sector was expected to continue in Southeast Asia, said Purvin & Gertz. The Indian subcontinent experienced average LPG-demand growth of about 10%/year in residential-commercial markets in the 1990s.
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 was expected to 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 was dramatically affecting international LPG markets. Asian demand in this sector alone 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 much greater LPG imports by countries in 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 1990-97, sharply 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.
Petrochemicals
The petrochemical sector is the other major growth market for LPG. This sector in 1997 accounted for around 19% of total-world base LPG consumption. Demand for LPG for the production of petrochemicals increased at an average rate of 7%/year in 1990-97.
Growth in this sector was stimulated by increased butane consumption as feedstock for production of methyl tertiary butyl ether (MTBE) during the first half of the 1990s. LPG consumption in this application expanded by more than 140% through 1997, but the rate of growth slowed in later years of the period.
Several MTBE plants were being developed worldwide in 1998, and butane consumption in this end-use sector could surpass 9 million mty if all these plants are constructed.
Feedstock requirements for worldwide olefins manufacture increased at an average rate of 4.6%/year in 1990-98. Worldwide, LPG accounted 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 was approximately 22 million mty in 1998. Consumption of LPG in this end-use application had grown at about 3.2%/year on average since 1990. This growth was somewhat slower than the overall market growth.
Nearly 98% of the world`s 1998 petrochemical use of LPG occurred in five regions: North America, Western Europe, the FSU, Latin America, and Asia. North America was the largest consuming market in this application.
The Middle East was emerging as a major market for LPG petrochemical use. LPG was being utilized as feedstock for olefins, aromatics, and MTBE in the region, said Purvin & Gertz.
Several new petrochemical complexes were being added, and regional LPG consumption was expected to jump before 2005.
World LPG supply
LPG production in the late 1990s was increasing worldwide as refineries were added or expanded to meet demand for transportation fuels.
This trend was particularly evident in Asia, where growth in refinery LPG supplies averaged nearly 7%/year in 1990-98. In 1997, LPG supplies from refineries accounted for about 70 million metric tons, or 39% of total world production.
Refinery LPG production growth was expected to continue because of increased refinery throughput, rising conversion-capacity utilization, and more restrictive environmental regulations, particularly gasoline vapor-pressure limits.
As a result, world refinery LPG production was expected to increase steadily to reach about 76 million metric tons in 2000 and 84 million metric tons in 2005, a growth rate of 2.3%/year.
Most of the world`s LPG supplies come from natural-gas processing. Production from gas processing was rising in 1998 as new gas production and utilization of existing gas plants gradually increased.
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.
Existing gas-processing facilities were expected to operate at rising rates in most major producing regions as crude oil and gas production increased. The commissioning of several projects worldwide would also contribute to the increase in LPG recovery from gas processing.
Over the forecast period, world LPG production from gas processing was expected to reach about 127 million mty in 2000 and 156 million in 2005, a growth rate 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). The increase represented an average growth rate of 3.6%/year. Purvin & Gertz expected that world LPG supplies would reach 240 million metric tons in 2005, growing at an average rate of 3.7%/year.
Regional increases
International LPG supplies were expected to rise most rapidly through 2005 in Africa, Asia, the Middle East, and the FSU.
Production in Africa through 1998 had increased primarily as a result of LPG-export projects in Nigeria and the Congo as well as expansions in Algeria. Total LPG production in the region in early 1998 was around 10.2 million mty, up about 38% from 1990 levels. Purvin & Gertz expected regional LPG supplies to expand by an average of more than 6%/year through 2005.
In Asia, LPG production was increasing rapidly. Demand was growing so fast, however, that even with supply expansion of more than 7%/year, increased amounts of LPG imports were required each year.
LPG production in Asia was enhanced by growing refinery production, particularly in developing countries, and by increasing supplies from gas processing, specifically in Malaysia and Thailand.
Purvin & Gertz expected the Middle East to continue to be the dominant export supplier of LPG. Outside of North America, the Middle East is the largest LPG-producing region of the world.
LPG production in the Middle East expanded during 1990-97 at an average rate of slightly more than 5%/year.
The rate of increase slowed toward the end of the period. Regional LPG production was expected to remain relatively flat through 2000, with no export-oriented LPG projects due on line and crude oil production unlikely to increase.
After 2000, several developments in the Middle East made LPG production gains possible.
Saudi Arabia was to expand its Master Gas System by 2005, allowing for some increase in LPG production. But Purvin & Gertz said several competitive developments in the Middle East could reduce Saudi ethane and LPG-recovery levels:
- Iran would gradually increase its LPG production with the addition of gas-processing capacity and higher offshore gas production and processing rates.
- Iraq should emerge as a major LPG producer and exporter during by 2005. The timing remained unclear in late 1998, however, clouded by the question of when United Nations sanctions would be lifted. Following removal of sanctions, some time would be required before LPG-export facilities could be restored to the capacity that existed before the Gulf War.
- LPG production in Qatar would also rise by 2005 as new gas production and processing facilities came on stream.
Total LPG supplies in the Middles East were expected to rise by about 35% through 2005. Most of the increase would occur after 2000, however, and a surge in use of LPG as petrochemical feedstock was expected to moderate export growth.
LPG production in the FSU, down since the mid-1980s, had started to recover in early 1998. The effect of the severe currency crisis later in the year, however, was unclear and clouded prospects. At the time, Purvin & Gertz was predicting continued growth through 2005 with LPG production rising by almost 90%.
Introduction of western capital and technology would 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 were expected to materialize shortly after 2000, but prospects became obscured in second half 1998.
LPG supplies were also increasing in Western Europe with development of new North Sea gas and gas-condensate fields. The build-up in North Sea LPG supplies began in 1993-94.
North Sea LPG supplies increased by almost 90% in 1990-98 and were expected to continue to rise, said Purvin & Gertz. Refinery supplies were not increasing, but the lift in North Sea supplies provided 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).
Exports from the Middle East appeared to be declining, at least through 2000, owing to the relatively flat growth outlook for LPG production and the build-up in LPG-based petrochemical projects in the region.
Net export availability from the Middle East was expected to decline to about 23 million mty in 2000 from around 25 million mty in 1997.
After 2000, net exports from the Middle East were expected to rise again, but many circumstances could alter this outlook, including a delay in resumption of LPG exports from Iraq.
Exports from Africa were expected to rise through 2005 as supply expansions outpaced regional demand growth. Net African LPG exports were expected approximately to double from 2000 levels and reach 9 million mty in 2005.
This development would be only part of the dramatic rise in LPG export availabilities Purvin & Gertz anticipated in the Atlantic Basin region, which includes Europe, Africa, and the Americas.
A major shift in regional LPG market patterns occurred in Latin America. Historically, this region had been a net LPG importer because of Brazilian requirements and, to a lesser degree, several smaller markets in South America, Central America, and the Caribbean.
While LPG demand continued to expand in Latin America in 1998, several new large gas-processing facilities boosted regional LPG supplies.
As a result, Latin American moved into position to become an LPG exporter.
By 2005, net LPG exports from Latin America were expected to exceed 5 million mty. In 1997, the region imported a net 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 world`s largest single market for NGL, the U.S. accounted for nearly 24% of global demand in 1998. A highly integrated infrastructure that 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. After the mid-1980s, production of natural gas slowly rose and seemed likely to 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 was expected to come from the Gulf of Mexico offshore Louisiana.
By 2005, Louisiana was expected to surpass Texas as the top U.S. gas-producing state.
Purvin & Gertz believed U.S. industrial consumption of gas would grow at nearly 1.6%/year. The market showing the greatest promise for growth was power generation, in which demand was expected to rise at 2.7%/year. The residential gas market was expected to expand but more slowly than in the past.
Total gas demand in the Lower 48 states was expected to increase at about 1.5%/year. Gas production was expected to grow at about the same rate.
Nonassociated gas was expected to increase its share of total production, which would reduce NGL content of total output.
NGL supply
Production by natural-gas processing plants accounted for about 73% of total U.S. NGL production in 1998 and essentially all ethane and natural gasoline produced in the country. Merchant isomerization units were an important supply source of isobutane and correspondingly a large consumer of normal butane.
Purvin & Gertz expected that natural-gas processing plant production of natural gasoline, isobutane, normal butane, and propane production would all increase at 1.0%-1.7%/year (Fig. 4).
Natural-gasoline production would increase most slowly because of the relatively lower fraction of associated gas production. Ethane production, however, would 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. was expected to reach nearly 2.2 million b/d.
The outlook indicated further growth in NGL production by gas plants in the U.S. Proved reserves of NGL reported by the U.S. Department of Energy`s Energy Information Administration (EIA) increased in 1995 and 1996. These increases reversed a downward trend that began in 1989.
Because of the rapid increase in gas production in Louisiana, NGL production from gas plants there were expected to rise very quickly: Total NGL production in Louisiana was likely to grow at about 5%/year. By 2005, total NGL production in Louisiana was expected to surpass 450,000 b/d, compared with 300,000 b/d in 1998.
A question loomed in 1998 about ethane production in Louisiana. Large amounts of ethane were likely to be rejected from gas plants during the following few years because of limited market growth in the state.
At least one ethane-based ethylene plant, however, was to be constructed in Louisiana along the Mississippi River after 2000. Therefore, as ethane demand increased, less ethane would be rejected, and ethane production would jump.
Fig. 5 shows Purvin & Gertz` outlook for NGL production by refineries, which in the U.S. are a substantial supply source of propane and also supply large 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 volatility limits for gasoline.
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. Annual refinery net production was likely to stabilize at about 100,000 b/d but remain seasonal.
Propane production by U.S. refineries had increased steadily since the mid-1980s and was expected to continue to increase. Purvin & Gertz cited three factors in this outlook for rising propane production from refineries:
- Gasoline production would continue to increase over time, and more propane would therefore be produced.
- As a result of production of reformulated gasoline, operating severities of many refinery units would increase and generate more propane.
- As a result of increasing the value of propylene, more propane-propylene mix would be recovered and sold in the chemicals market.
U.S. imports of normal butane, isobutane, and natural gasoline were expected to remain constant until 2000. Slightly less imported normal butane would then be required as a result of Phase II gasoline reformulation, which promised further to reduce U.S. demand for normal butane.
Ethane in the late 1990s flowed into the U.S. from Canada in the Cochin Pipeline.
Beginning in 2000-2001, however, the Alliance Pipeline was to ship ethane as a mixture in the natural gas exported to the U.S. Purvin & Gertz did not show these volumes as ethane imports because they would be recovered from the natural gas in a straddle plant in the U.S.
Propane was expected to 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. would not be forced to buy propane at a premium price, however.
Rather, propane would 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 believed propane would be available to the U.S. at a relatively attractive price.
NGL demand
Purvin & Gertz expected that NGL demand in the residential and commercial sector would grow at only 1.1%/year (Fig. 6). Although this sector had historically been the largest consumer of propane, in 2000-2001 it was possible that propane use by ethylene plants would become the largest end-use sector.
Refinery demand for NGL, mostly normal butane and isobutane, was to remain nearly unchanged.
Start of Phase II of the gasoline-reformulation program in 2000 was expected to raise demand for isobutane but lower refinery demand for normal butane.
The major growth market for NGL was 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 was expected to grow at a rate of 1.6%/year.
The most dynamic market for NGL in the U.S., however, was likely to be for the production of ethylene. By 2005, ethylene-feedstock demand for NGL was expected to rise to nearly 1.7 million b/d from about 1.3 million b/d in 1998.
Both propane and ethane demand as ethylene plant feedstocks were expected to increase steadily through 2005. The major factor behind this growth was the U.S. ethylene industry`s continuing to build NGL-based crackers through 2005.
NGL-based crackers would provide a higher rate of return than naphtha-based crackers because of their lower capital costs. Therefore, Purvin & Gertz believed that, as long as the ethylene industry believed that adequate supplies of NGL would be available, it will continue to build NGL-based units.
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Expansion in 1998 at Coastal Field Services Co.`s Pelican gas plant near Patterson, La., raised inlet capacity to 325 MMcfd. The plant processes gas from the western Gulf of Mexico. Photograph by Brian Alfes, courtesy of ANR Pipeline Co.
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These spheroids at Abqaiq, Saudi Arabia, handle NGL produced from Saudi Aramco`s Southern Area. NGL processed at Abqaiq moves via pipeline to Ras Tanura for fractionation. Photograph courtesy of Aramco Services Co., Houston.
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Intake lines bring crude oil and associated gas to Saudi Arabia`s Haradh GOSP-1 plant in southern Ghawar field. Photograph courtesy of Aramco Services Co., Houston.
