Outlook – LPG eyes on Russia, US, Brazil
London, 3 January (Argus) — Russian and US exports — including ethane — together with Brazil's import surge and regional petrochemical demand will set the pace for the European LPG market in 2014.
With high prices in the south attracting all available product and leaving little to cover substantial shorts in the north, December was a struggle for buyers in northwest Europe. But mild weather combined with minimal petrochemical cracking in November and December tempered the demand side. Prices have since fallen relative to naphtha, to levels that are likely to re-ignite cracking interest. If the long forecast cold weather finally appears, northwest Europe should see prices soar to attract the necessary imports.
Additional export capacity in Houston has been one of the biggest stories in LPG this year, with a substantial rise in exports into northwest Europe. This is thanks to midstream firms Enterprise and Targa expanding their terminals on the Houston Ship Channel to deal with the extra product from the shale gas expansion. Enterprise exports rose from 4mn bl/month to 7.5mn bl/month while Targa expanded its LPG export terminal in Galena Park to load 5mn bl/month — some four VLGCs a month — of international grade low-ethane propane.
In the short term, an influx of very cold weather in the US, coupled with ever increasing exports particularly to Asia-Pacific and Brazil saw inventories reduce towards the end of 2013. If this continues, there could be low US stocks in February/March 2014 and lower exports to Europe.
In October last year, Enterprise announced a further 1.5mn bl/month expansion of its existing 7.5mn bl/month LPG export terminal and a second new export facility — at an as yet unannounced location — that will move 6.5mn bl/month. They will have an aggregate capacity to load of 16mn bl/month, supported by more than 25 agreements, some of which extend through 2024. The partnership could include ethane export capability. Since Switzerland-based petrochemical producer Ineos brokered a 15-year deal last year with Range Resources to import ethane to the Rafnes petrochemical hub in Norway, other European players have been looking hard at their options for this year. Potential suppliers, such as Enterprise, are showing strong interest in striking long term ethane deals in Europe, where buyers are keen to have multiple suppliers so they are not tied to a single source. No new deals have been announced yet, but some are expected to be fixed in 2014. Ineos plans to begin importing ethane to feed its 2mn t/yr petrochemical plant at Grangemouth in Scotland. US ethane exports make sense globally, as the cracking margins are far superior to naphtha-based ethylene production.
Brazil has emerged as a growing consumer of LPG with higher than expected consumption and lower than expected domestic refinery production during the football World Cup and the Olympics preparations. State-owned Petrobras is drawing product away from northwest Europe by paying premiums for US loadings. All eyes will be on Brazil in 2014 to see if increased imports are sustained.
Russia's new Ust Luga trans-shipment terminal will become a major player in the northwest European market in 2014. It began exporting LPG in May 2013 into local Baltic ports such as Terneuzen, Stenungsund and Rafnes, with a few cargoes going further afield to Le Havre in northern France. But this year could see as much as 100,000t/month of 70:30 propane and butane being exported into the region, providing stiff competition to North Sea production and putting pressure on prices.
The Ust Luga terminal will also have an increased impact on the Mediterranean market in 2014. Towards the end of 2013, Mediterranean butane and propane prices rose sharply because of a dearth of Black Sea product. This was attributed in part to Ust Luga absorbing many of the Black Sea tonnes, but also to a plethora of logistical issues for railcars, ranging from the impact of a Russian military exercise over the summer to Winter Olympics preparations at Sochi to refinery turnarounds. Added to this were diminished exports from Libya and increased seasonal demand, in particular from Morocco and Egypt, with one particularly persistent buyer returning almost every day to the spot market. In December, all North Sea product was being sent south because of more favourable economics. The strong prices were reflected in Algeria's state-owned Sonatrach's posted December price of $1,030/t for propane and $1,120/t for butane, substantially higher than expected and the highest since Argus began recording prices in 1993. As logistics return to normal in Russia, Black Sea product flow into the Mediterranean should improve, but this depends on how much more Ust Luga will absorb next year as it reaches full export capacity. Turkey, Egypt and the rest of north Africa are all expected to see growth in their domestic markets.
Strength in the Asia-Pacific region will only grow in 2014, sucking product away from Europe with higher price levels. China's growth in propane dehydrogenation units (PDH) is already supporting prices, because of the large spread between international propylene and propane prices. With many new units starting up this year it is likely to be 2015 before capacity is reached, by which time China will account for 40pc of global PDH capacity. With no sign of a slowdown in demand in India, the east-west premium is there to stay with little Mideast Gulf product flowing west in 2014.
LPG shipowners have positioned themselves for growth over the next two to five years, with a spate of consolidation and fundraising in the sector taking place during 2013. Their intention is to raise enough capital to purchase new and second hand vessels – at least 47 new very large gas carriers (VLGCs) are expected to be delivered over the next three years. The underlying reason for the bullishness in LPG shipping is the increase in exports, thanks to Targa and Enterprise expansions. The expansion of the Panama Canal, scheduled for completion in 2015, is only reinforcing the fervour of shipowners, who are aware of the potential of shipping cheap US LPG to the Asia-Pacific markets. This was highlighted on 6 December, when Japan's Astomos ordered two VLGCs in order to import US LPG via the expanded central American conduit. Whether the vessel supplies outstrip demand in 2014 is yet to be seen, but there has been very little to suggest from owners that this is the case, even with deliveries of vessels expected across all four quarters.
Refinery run rates in 2014 are likely to stay fairly low, at around 80pc, with volumes of propane and butane going ever lower as gasoline consumption decreases in favour of diesel and carbon-friendly vehicles.
The large cargo butane market died a death at the end of 2013 with barely any interest or discussion, with the focus primarily on the region's multiple propane shorts.
The two main sources of butane will also be the US and Ust Luga this year. Ust Luga primarily transports normal butane and iso-butane, with just one mixed butane cargo sold in 2013, to petrochemical producer and refiner Lyondell Basell. Neither Lyondell Basell nor US refiner Valero will take normal — or n-butane — but plants at Le Havre (Total), Terneuzen (Dow) and Stenungsund (Borealis) will all take it for cracking. With more n-butane being produced thanks to the increased export berth availability at Ust Luga, this means there is likely to be a reduction in mixed butane coaster buying as the petrochemical producers take up the more readily available, and therefore cheaper, n-butane from the Russian facility. This is likely to overshadow the US butane market, which also mainly exports n-butane and iso-butane but cannot sell it to Borealis, which buys around 300,000-350,000t/yr. This makes it a less attractive option for buyers of US product into Europe where they may want to sell into the Borealis cracker at Stenungsund in Sweden.
The mixed butane market is likely to remain fairly healthy with Karsto, Mongstad, Braefoot Bay and, to a lesser extent, Grangemouth providing product to Lyondell Basell and Valero's Pembroke facility.
The price of ethylene in 2014 will be one of the contributing factors deciding how much butane is cracked compared with propane. If ethylene prices are low, less butane is cracked, and vice versa.
Summer is traditionally the time when more butane is cracked because it tends to be cheaper than propane, but during the summer of 2013 price divergence was not clear cut. On 12 June, large cargo butane was $765/t cif ARA and propane $790/t cif ARA but one week later butane levels were $820/t cif ARA and propane $790.50/t cif ARA. While Borealis and Dow, which can switch feedstocks easily, cracked a lot of butane because of a more economically favourable yield, other petrochemical producers with less flexible furnaces stayed with naphtha and/or propane.
Overall, in the North Sea both propane and butane exports are declining on falling gas production in the UK North Sea, while Norwegian gas production is still steady. The big question is whether petrochemical demand will be high enough to maintain strong buying interest for propane over naphtha in northwest Europe. At least two petrochemical producers bought January propane cargoes and, if cold weather arrives, demand and prices are expected to see a healthy start to the year. Where the product will come from is another matter. Production problems such as those at Braefoot Bay in the UK and Karsto in Norway throughout December caused several shorts. And strong prices in the Mediterranean sucking in all available North Sea product could persist into the start of 2014, leaving northwest Europe prices high and buyers competing for tonnes.
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