Asian refiners snub Middle Eastern LPG

Cheap US LPG threatens to out price the Middle East in the battle for Asian feedstock markets

Asia Pacific is the world’s largest importer of LPG, and will require 100 million tons per annum by 2020.
Asia Pacific is the world’s largest importer of LPG, and will require 100 million tons per annum by 2020.

The Middle East’s LPG industry could be on the verge of losing its biggest customer, as Asian refiners look to take advantage of super cheap US LPG as feedstock for their refineries and cracker units.

Historically, refineries in Asia have used Naptha as their feedstock of choice. However, a recent flood of cheap LPG, brought about as a result of the US’ shale revolution, is leading many Asian refiners to switch to LPG. Despite the cost of converting the plants to be LPG compatible, the low price of US LPG is too good an incentive to ignore for many of Asia’s refiners.

“With the big surplus of LPG available, Asian refiners are certainly going to be looking at using what they can, if they think it is going to be cheaper versus Naptha. We have already seen that a lot of North East Asian olefins crackers can use Butane to substitute for Naptha. I think the trend we see coming is that Asian crackers will be looking to use more propane because the propane will be particularly long,” said Dr Walter Hart, Senior Director for NGL research at IHS.

While the decision to reduce Naptha consumption will hit the Middle East’s producers, such as Kuwait Petroleum, hard, it is the shift away from Middle East produced LPG that will take the biggest toll on the region.

In June, prices for LPG were around $916 per ton compared with $972 per ton for Naptha, a difference of 5.7%.
The Middle East currently produces 54 million tons of LPG per annum, the majority of which comes from the regions numerous gas field.

As upstream oil and gas exploration and production increases, so too will the region’s projected output of LPG, which is set to rise to 85 million tons per year by 2020. With the region’s domestic demand only increasing to 25 million tons per annum by 2020, the Middle East will be left with a sizeable 60 million tons per annum of exportable product.

Asia Pacific is the world’s largest importer of LPG, and will require 100 million tons per annum by 2020, a 20% hike from today’s figures. However, with US LPG being so cheap, Asian refiners look set to snub Middle Eastern LPG supplies.

LPG from the US is currently available for around $600 per ton, whereas LPG produced in the Middle East can retail for up to $780, according to a recent report issued by news agency Reuters.

Despite the logistical costs associated with importing LPG from the US, this still gives US producers a huge competitive advantage over their Middle Eastern counterparts, the availability of super cheap LPG from the US has been born out of the enormous shale oil and gas production boom. The US currently has an LPG surplus of around 270,000 bpd, which is set to double by as early as 2020.

The US Shale boom production of oil and natural gas has produced huge quantities of NGLs (natural gas liquids) as a biproduct.

In the US, Propane and Butane markets are mature.The only growing market being Propane Dehydrogenisation. The rise in Propane Dehydrogenisation is not enough to use up the surplus LPG and consequently the US is looking to export that surplus product.

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The US currently sends a huge amount of LPG to Latin America where it is used in domestic applications, for cooking, heating and domestic applications.

“The US currently ships LPG to Latin America, but just because Propane is cheap doesn’t mean that people are going to cook more often. That market is pretty mature and, because of that, the US has to send its LPG to different locations,” said Hart

European markets tend to be very competitive, but the US does have some plans to ship LPG to Europe. The vast bulk of the United States’ LPG surplus will be sent to Asia.

“Asia is a growing market and it also has a lot of residential and commercial demand, as well as chemical demand for use as feedstock. That is the same market that is currently being served by the Middle East,” said Hart.

LPG prices in the US have been weakening versus crude oil and Naptha for a number of years. One reason for this rapid fall is that the US lacked sufficient LPG export capacity. Now that a number of LPG export terminals have been constructed in the states, the price has rebounded. Importers of US LPG will need to consider the logistical costs of sourcing the fuel as well as the US’ competitive base price.

“US prices are going to maintain a differential between themselves and the international markets because they need to cover the arbitrage; the freight, the canal fees, the cost of getting it out of the Bellevue wells and into the ship. It has to be priced cheaply enough to cover all of those additional costs,” said Hart.

As LPG is produced as a biproduct of standard oil and gas production, the decline in demand will not affect the Middle East’s LPG production levels. On the contrary, the region’s production levels are predicted to rise sharply in the coming years.

“As far as the global prices go, LPG has been weakening steadily versus crude, as I mentioned.We expect that LPG prices will remain flat, possibly declining a little further. Increasing supplies from the Middle East, from Russia and from Asia itself mean that the amount of NGLs that are available is growing faster than the supply of crude oil,causing their price to weaken relative to the price of crude,” said Hart.

The Middle East will need to find new markets for its LPG or it will be forced to diversify its use of the product. According to a report issued by UOP Honeywell, the Middle East is ideally placed to turn its attention to
Propylene Synthesis.

“From a pricing perspective, our preliminary analysis suggests that a Middle East producer gets up to a 30% discount on feedstock price versus an Asian producer. Historically, Saudi Arabia’s LPG pricing followed crude.
Going forward, Saudi Arabia may lose its dominant position with UAE/Qatar taking the lead. On the other hand, given the forecasted excess supply, it is possible that LPG pricing will de-couple from crude and follow independent market-based pricing on Dubai Mercantile Exchange,” the report said.

The US shale boom has undoubtedly changed the global LPG landscape.

With the Middle East struggling to compete in the global market, it will need to develop a sustainable, long term alternative to its current export strategy if it is to maximise its long term profitability.

“The American shale boom is going to be around for quite a long time. It’s going to be many, many years before those major plays start to decline. Because of that, the Middle East region needs to prepare for the long term rather than just seeing this as a short term strategy,” said Hart.

Factbox:
- 54 million tons p.a. The Middle East’s currentLPG production levels annum
- 85 million tons p.a. Projected Middle Eastern LPG Production by 2020.

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