Low build fuels concern

September 1, 2007 By    

Amassive expansion in liquid natural gas production had propane experts earlier this year forecasting a record boost in supply and a resulting drop in prices for propane marketers gearing up for the 2007-08 winter.

But a weak summer build had the nation’s primary propane supply at just 53.4 million barrels as of Aug. 17, notably shy of the 65 million-barrel benchmark the industry considers sufficient heading into the upcoming winter heating season.

What gives?

Ron Gist, senior principal at Purvin & Gertz Inc. and senior editor of its monthly NGL service, insists the crystal ball is still on track. He says global changes in supply and demand will inevitably impact the domestic propane picture – albeit later than originally projected.

At its annual International propane Seminar last March, the Houston-based firm outlined a series of factors that were expected to boost worldwide propane supply beyond demand through 2012. The most glaring reason is the tripling of worldwide LNG supply from 2000-14.

U.S. Regionala Propane Inventories and Prices: Base Case
U.S. Regionala Propane Inventories and Prices: Base Case

The phenomenal growth of the Middle East in the petrochemical consumption of propane is driving much of the change. By 2010, the region is expected to surpass Europe and challenge North America as the world’s major petrochemical feedstock demand center. New LNG plants are being built there to satisfy that growing demand, spurring production of propane as a byproduct in Quatar, Saudia Arabia, Iran and Iraq.

Purvin & Gertz officials say a whopping 5.7 billion barrels could be added to the world propane supply picture from 2006 through 2012. More than 40 percent of that growth will come from the Middle East. Global propane supply surplus (total world supply minus total world demand) is expected to peak at 235.6 million barrels per year in 2008, and remain high over the next four years.

Basic supply-and-demand economics suggest propane prices should come down.

If prices fall enough, of course, it could lead to increased propane consumption as a feedstock. If not, the product will have to be stored – increasing the likelihood that it will be shipped to the United States where ample, cheaper storage is available. As a result, Purvin & Gertz officials last spring predicted stockpiles of 66-82 million barrels heading into winter.

 Annual Increase in LPG Supply, Million Tonnes per Year
Annual Increase in LPG Supply, Million Tonnes per Year

“We are sticking to our projections, but they obviously haven’t yet come in,” Gist says.

“We said 2007 was the beginning of this increase as these LNG projects started up, but many more will be starting up next year – especially in the second half. It may be that we were premature to expect an increase in 2007.”

Part of the shortfall can be traced to a decline in propane imports. Through June, domestic propane imports were at 11.9 million barrels, down from an average of 14 million barrels over the last three years. That jibes with international shipping data that shows world exports down some 85,000 barrels per day through June. Most of that falloff has come from the Middle East.

Additionally, North Sea exports through June were down 1.24 million barrels per month due to operational problems, and major South American exporters Argentina and Venezuela both have been struggling.

“That’s certainly part of the puzzle for the U.S. market,” Gist says.

“When you start snooping around a bit, you hear rumors. One is that Saudi Arabia has been spiking propane into their crude oil exports because the propane prices have been depressed. They have been shoving it into the crude and getting crude oil value rather than selling it at a depressed price. Plus, if they sold more into the market it would depress the market further. So, they get a double effect.”

Another piece to the puzzle for the U.S. supply picture is flat U.S. oil production at about 500,000 barrels per day. Production rates are roughly the same as last year, but remain off from several years ago before summer hurricanes knocked out production and distribution facilities.

U.S. Waterborne Import Growth 1995-2010
U.S. Waterborne Import Growth 1995-2010

“We never quite clawed our way back to the rates we had before Katrina,” Gist says.

“We are calling for that to increase in latter half of this year with the Enterprise gas plant project in the Gulf and several in the Rocky Mountain region. Things probably are going to get better on the production side, although we are not exactly setting the world on fire. Refinery production is actually up a bit versus 2006, but early 2006 was hurt by the hurricane shutdowns from 2005.”

Meanwhile, domestic production from gas plants is holding its own even though it is running behind the curve on inventory heading into August.

Stockpiling Supply

Industry experts say bountiful propane supply and historically high oil prices will dramatically ramp up global exports, create an arbitrage scenario that favors cracking, storing or shuttling product into the U.S. marketplace.

Analysts say there is sufficient shipping and storage to handle the supply arriving from Asia, Africa, Latin America and the Middle East. In fact, they expect 2007, 2008 and 2009 to be watershed years for exports, pushing U.S. imports to record levels.

U.S. Petrochemical Demand for Propane
U.S. Petrochemical Demand for Propane

U.S. propane imports rose 30 percent from 1995-2005, hitting a record 62 million barrels.

Lynn Bourdon, senior vice president of marketing and supply for Enterprise Products, told seminar attendees that benchmark will more than double by 2008. He also confirmed that U.S. terminals have sufficient capacity to handle the excess supply, which could push capacity utilization from 55 percent to 82 percent.

Will it happen soon enough to build the 65 million-barrel stockpile for this year?

“The answer is yes, I think so,” Gist says. “But it all comes down to money.”

Price Points

August propane spot prices at Mont Belvieu hung steady around $1.19. Purvin & Gertz is calling for prices around $1.20 throughout the winter.

“If prices go high enough, two things happen: You start enticing more imports to the U.S., and if prices are high relative to other feedstocks, you start impacting that demand. If we don’t get there, we will eventually solve the problem with extremely high prices,” Gist says.

Ethylene has been using a healthy amount of propane for domestic feedstocks in first half of 2007, averaging 395,000 barrels per day. That compares to about 385,000 barrels one year ago.

Purvin & Gertz officials had been anticipating record domestic petchem demand given excess propane supply.

Gist says that projection, too, depends on stock build.

“It’s a cause-and-effect scenario. If imports are high it would provide a plentiful supply of cheap feedstock to drive cracking,” he says.

“We have been cracking a lot of propane in the first half, but we are calling for rates to come down. We won’t hit record levels for the year. We are on track for an average of 380,000 barrels per day. That’s equal to or slightly above last year’s rates, even with our call for a fall-off in second half.”

Wild Cards

As always, crop-drying demand, weather, secondary and tertiary storage supplies are wild cards that can throw seasonal projections for a loop.

The largest anticipated corn crop in more than 60 years could mean an above-average demand for propane this fall. About eight of 10 row crop producers use propane to dry their grain.

“That should add to the load, but it’s hard to quantify that demand because we don’t know the weather conditions at harvest. If it’s a dry fall, farmers can leave it on the stalks a little longer so that it dries in the field. If it’s a wet fall the corn brought in could bring a fairly sizable demand,” Gist says.

” It’s never really a big part of the overall market, but it hits at the worst possible time – when we are trying to build inventories for the upcoming winter.”

Likewise, federal government inventory data addresses only primary storage. How much gas remains in tanks in the field is anybody’s guess.

“We never really know how much is downstream in retailer and consumer tanks. It could account for a sizable pad in the millions of secondary and tertiary storage tanks out there. We don’t even know the capacity. There is a chance that those levels are low, but there’s no good way to confirm it,” Gist says.

Despite those unanswered questions, Gist does not foresee a shortage of product for home heating this winter. He says the market could get tight, but improvements in imports and cracking demand could correct the market.

“It never ceases to amaze me,” he says. “One year we seem fat, dumb and happy with no problems. The next year it’s a rocky ride ahead. It never seems to be anywhere in the middle; we just seem to bounce from one ditch to another.”

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