The emergence and growing supplies of alternative feedstocks are challenging LPG's position in Europe
The European petrochemical sector's growing appetite for LPG has been vital in maintaining the region's position as an important LPG hub over the past few decades. But this outlet could come under increasing strain from more readily available and competitively priced naphtha from European refineries, as well as ethane from the US, all while regional olefins production flags.
Europe's LPG production and demand for LPG as a fuel is in a state of long-term decline. The former is being constricted by North Sea field decline and energy transition pressures in Norway and the UK, even if investment is made to try to shore up North Sea oil and gas supplies in the prelude to net zero. It is also hamstrung by an ageing refining sector sorely lacking in investment and also at threat from the energy transition. Non-petrochemical LPG consumption meanwhile has been sliding and would have fallen more sharply were it not for the growth in autogas sales in eastern Europe — another sector moving towards decarbonisation.
This demonstrates how important cheap and abundant US LPG imports have been in terms of supply, and investment in the flexibility of Europe's fleet of ethylene steam crackers in terms of demand. The latter has arisen from the year-round discounts LPG has secured over naphtha feedstock since US supplies started washing up on Europe's shores. But healthy LPG discounts to naphtha could be about to shrink, because European refineries are increasingly producing more naphtha at the same time as oil products and cracker feedstock demand wanes.
The region's refiners have found naphtha weighing much more heavily on their bottom lines since the Covid pandemic. Naphtha's discount to North Sea Dated crude has averaged $8/bl this year in northwest Europe and $11/bl since 2022, compared with $4/bl in 2010-19. EU refiners produced much more naphtha this year and last year than they delivered domestically, including to petrochemical producers, Eurostat data show. This is because the best-value crude for them has become increasingly light. The loss of Russian medium sour Urals owing to EU sanctions has been partly offset by more naphtha-rich US light sweet WTI arriving in the region — climbing to about 1.86mn b/d in the first half of the year from 1.45mn b/d in 2022, Kpler data show.
The light naphtha increasingly emerging from refineries is more suitable for cracking. But EU olefins output has shrunk since the pandemic, with cracker operating rates still trailing far behind those prior to 2020. European polypropylene production last year was the lowest since at least 2013 and 20pc lower than a 2017 peak, Eurostat data show. This is partly because the EU petrochemical sector has lost competitiveness with its Asian rivals.
Cheap slates
The US shale boom that has flooded Europe with cheap LPG has also blessed the US with bountiful volumes of an even cheaper petrochemical feedstock — ethane. Overseas shipments have grown over the past two decades, but the investment needed in ethane-fed crackers, US export capacity and ethane vessels has limited European uptake. Yet flows are increasing. Europe has imported around 180,000 t/month of US ethane this year, steady from 2023 but 12pc more than in 2022, Kpler data show. The US has been shipping 750,000 t/month since 2023, more than triple the 2017 volume. US ethane prices meanwhile keep falling as supplies keep growing.
European producer Ineos is due to open Europe's largest cracker in Antwerp by 2026, a 1.4mn t/yr ethane-fed unit. Other investments in new ethane-fed capacity could emerge, or in conversions of crackers. The challenge of getting the ethane over the Atlantic may prolong plans to increase its use in Europe, but it is likely to arrive in increasing volumes and probably join swelling naphtha supplies, potentially reducing LPG's appeal among producers looking to regain their competitive edge.
