This is the second installment of a two-part series from the March 2015 issue of Hart Energy’s FUEL magazine. Read the first part of the series here.

With the recent start-up of the latest LPG export facility, Mariner South, the U.S. Gulf Coast has the infrastructure to support LPG exports of around 20 million barrels per month (MMbbl/m), most of which is propane.

Since 2013, capacity has more than tripled—encouraged by cheap Mont Belvieu, Texas, propane, which was priced at a large discount to Northwest Europe and Far East values during 2012 and 2013.

“Between Sunoco Logistics’ Mariner South project and Targa Resources’ expansion last fall, propane export volumes could average 8 MMbbl/m higher this spring vs. last,” Genscape’s petrochemicals and NGL Consultant, Amanda Townsley told Hart Energy.

In recent months, propane has traded close to “arb parity” with the spread between Northwest Europe and Mont Belvieu propane barely covering freight and variable costs to get across the docks. Such narrow margins should reduce exports over time by offering little incentive for traders to bid on spot cargo slots offered by terminal operators, Townsley observed.

In mid-January, strength in international pricing—the Far East in particular—widened the arb out again, calling into question whether the globe is looking for more propane from U.S. shores.

This has even helped U.S. propane price strengthen vs. other domestic feedstocks and crude oil.

“Over the past three years, the U.S. has transformed itself into the world’s top LPG exporter. But further growth looms, as the country gradually reaches its full natural gas liquids export potential—dominating global LPG trade,” Townsley noted.

In addition, U.S. propane stocks are unseasonably strong this winter, as ongoing production surges and a closed export arbitrage have led supply to outpace takeaway since the beginning of the demand season in October.

Potential Markets

New export facilities along the Gulf Coast—13 in all— will triple capacity from the current level of 500,000 bbl/d to 1.5 MMbbl/d by 2016, according to Townsley.

The U.S. is already exporting in excess of 500,000 bbl/d of LPG—90% of it from the Gulf Coast—so the region is already operating at or above capacity. Enterprise Products Partners LP, Phillips 66 and Targa Resources Partners LP are planning the largest LPG export-capacity expansions. Enterprise plans to boost capacity at its Houston Ship Channel facility from 250,000 bbl/d to more than 500,000 bbl/d by the end of 2015.

Phillips 66’s new Freeport, Texas, facility will have a 150,000-bbl/d capacity when it enters service later this year, and Targa is planning smaller expansions at its Houston and Mont Belvieu, Texas, terminals.

In global terms, the LPG market is roughly 8.5 MMbbl/d, with global maritime trade pegged at around 2 MMbbl/d.

And the majority of U.S. LPG exports are destined for Latin America. In fact, more than half of the increase in exports from 2012 to 2013 was absorbed by South America—Brazil in particular, according to Oxford Institute of Energy Studies (OIES) director Bassam Fattouh.

Other export opportunities exist as well. Japan, a huge importer of LPG, is looking to diversify away from Middle East exports to feed its growing residential, commercial and petrochemical demand. LPG demand in South Korea is also growing in the same sectors, the OIES’ Fattouh told Hart Energy.

Data for 2013 show that Japan imported 952,000 mtpa of U.S. LPG, constituting roughly 8% of its total imports of 11.57 mtpa. In addition to the large volumes involved, of equal significance is that U.S. export prices are linked to Mont Belvieu, Texas, LPG prices rather than Saudi Aramco CP Prices, according to the OIES report.

In South Korea, E1 Corp, the second-largest LPG importer in the world, announced plans to purchase 180,000 mtpa of U.S. LPG, equivalent to 11.3% of E1’s total volume of 1.58 mtpa in 2011. The deal was part of South Korea’s effort to import more than 8 mtpa of LPG produced from shale gas by 2020. SK Gas, the country’s biggest LPG importer, also plans to source U.S. supplies, according to the OIES.

Meanwhile, other emerging economies—China, India and Indonesia—will require greater LPG imports to meet demand growth for residential and commercial use. China alone is planning 17 propane-dehydrogenation (PDH) projects, resulting in at least 200,000 bbl/d of incremental propane demand by 2015, the OIES report observed.

“If all of these plants are constructed, they would require huge volumes of propane. Chinese PDH plants, in particular, are likely to require imported propane because of a lack of high-purity domestic propane production,” he said.

“For many years, China’s petrochemicals had little choice but to rely heavily on Middle East imports, but this is already changing. Many Chinese PDH plants have signed export agreements with U.S. propane producers to secure long-term propane supplies,” Fattouh added.

Future Implications

The shifts in supply and demand patterns of LPG are already having wide repercussions on global trade dynamics, the OIES report observed.

On the supply side, the shale revolution has introduced the U.S. as a new and powerful player, adding a new dimension to the global LPG scene, noted Fattouh.

“The sharp rise in U.S. LPG exports has allowed Asian players to have access to new source of supply, competing for market share with some of the key traditional suppliers to Asia.”

In terms of impact on LPG prices, the picture is less clear, the OIES’s Fattouh said.

“Although LPG output from the GCC is expected to rise in the next few years, there is large uncertainty regarding the volume of LPG available for exports. Internal demand dynamics and the drive toward diversification imply that a large percentage of the increment in production from the GCC will be used domestically, and hence the potential impact on LPG prices will not be as severe as some are predicting.

“Liquid cracking could also offer opportunities for GCC producers to capture a larger share of the higher value petrochemical specialty products, which fits within GCC governments’ policies and, rather than competing for LPG exports, GCC producers may end up relying more on propylene exports.

“Perhaps the biggest uncertainty, however, is whether access to cheaper U.S. LPG will induce Asian petrochemicals to start seeking alternative feedstock away from Middle East naphtha, which would have a dramatic effect on LPG and naphtha markets and consequently on petrochemicals trade,” Fattouh observed.

In short, the OIES report concluded that U.S. LPG exports to Asia could prove to be not only a positive supply shock, but also a shock to the structure of the petrochemical industry and petrochemical trade flows.

Contact the author, Kristie Sotolongo, at ksotolongo@hartenergy.com.