The Market Outlook for Light NGL Feedstocks
Dr. Walter M. Hart, P.E.
Vice President, NGLs, IHS Markit

Ethylene and propylene monomers serve as the basic building block for the world's highest volume plastics. The over whelming majority of ethylene is produced in steam crackers that use naphtha or ethane as their feedstock. Propylene has traditionally mostly been byproduced from steam crackers and refinery fluidized catalytic crackers (FCCs), but propylene is increasingly being produced on "purpose" via propane dehydrogenation (PDH) and metathesis.

Commercial production of NGLs (ethane, propane, butanes and natural gasoline ) nearly all comes as a byproduct of natural gas processing and crude oil refining. Global 2018 production of NGLs is expected to be around 460 million metric tons.

Market Clearing Mechanisms
Ethane is produced as a specification product primarily to serve as a feedstock for steam crackers. The small remainder of produced ethane is used as fuel, and is often produced only to avoid exceeding the BTU specification in the sales gas. A large amount of ethane is left in natural gas around the world - the de facto market clearing mechanism for ethane.

Roughly half of global LPG (propane and butanes) is used in residential and commercial applications such as cooking and heating. The second largest application for LPG is for petrochemical feedstocks. Petrochemical applications that cannot substitute any feedstocks for NGLs are considered base chemical applications; examples include the production of maleic anhydride and propane dehydrogenation. In contrast, there are feedstock flexible steam crackers in which LPG can substitute as a feed for naphtha or ethane. These substitute feedstock applications are price sensitive and serve as the market clearing mechanism for LPG. Residential/commercial applications are considered premium demand because consumers will generally pay a premium for LPG over the price sensitive demand from petrochemical consumers.

Impact of US Shale Development on NGLs
Development of US shales for the production of crude oil and natural gas has resulted in large increases in ethane and propane production, although production of all US NGLs has risen. The only NGL with a significant demand component driving production is ethane, since ethane that is not recovered for petrochemical use at gas processing plants (a.k .a "rejec ted ethane") is left in the natural gas stream.

Figure 1: US ethane disposition becomes uncertain after 2020

Availability of all the NGLs in the US has exceeded domestic demand, resulting in large quantities of NGL exports. The US is now the only large scale expor ter of ethane in the world, has become the world's largest LPG exporter, and sends nearly all its surplus natural gasoline to Canada for use as a diluent.

Figure 2: Global LPG production growth is led by only a few sources

US Ethane Demand
Prior to the shale boom, US ethane availability was decreasing gradually as conventional crude oil and natural gas production declined. As shale development commenced, increasingly available ethane was fed into flexible ethylene crackers (Fig 1), mostly displacing naphtha and some propane. By 2011 flexible ethane capacity was nearly maximized, forcing surplus ethane into rejection and creating oppor tunities to look for alternative uses of ethane. In 2013 pipeline shipments of ethane to Canada began. Meanwhile, entrepreneurs pondered expor ting waterborne ethane for fuel and petrochemicals, and petrochemical companies were planning a first wave of new ethane -based ethylene crackers. By 2016 two ethane export terminals were operating, the first of the new ethane -based ethylene crackers began operation, and ethane rejection began to subside.

The first wave of firm petrochemical projec ts on the US Gulf Coast will be mostly completed by 2020. With increasing shale -based NGL production there is still not enough domestic demand to consume available ethane. Consequently, a second wave of new domestic ethane-based ethylene crackers is being evaluated, along with additional ethane exports.

US Ethane Exports
Three ethane pipelines to Canada are in operation. With increasing availability of ethane from Canadian shale plays, it seems unlikely that more pipeline capacity from the US will be needed.

There are two ethane marine export terminals operating in the US: the Sunoco (Energy Transfer Partners) terminal at Marcus Hook, Pennsylvania on the East Coast, and the Enterprise terminal at Morgan's Point, Texas on the Gulf Coast. Most of the ethane from these terminals is moving to Nor thwest Europe and to India, with smaller amounts sent to Brazil and Mexico. The Sunoco terminal is currently constrained by the capacity of the ~70,000 b/d Mariner East 1 pipeline, which has been shipping both propane and ethane from the Marcellus/Utica plays and dealing with a temporary pipeline shutdown. 2018 ethane expor ts through July have only averaged about 20,000 b/d. Some capacity is still available at the Enterprise terminal, but could potentially be filled by the GAIL cracker project in India if it proceeds as announced.

There has been great interest in ethane exports to China. The SP Chemical cracker in China should begin importing ethane by 2019 - the only Chinese project to construct ethane -related import assets so far. Since existing ethane terminal capacity is largely committed, incremental projec ts will require additional infrastructure: export terminals, ethane carrier ships and import terminals. Two new ethane export terminals have been announced for the US Gulf Coast, but neither project has yet made obvious physical progress on any of the required infrastructure. American Ethane has several announced offtake par tners in China for their project; if it proceeds it will likely be much delayed from the announced 2020 star tups. The Energy Transfer Partners/ Zhejiang Satellite Orbit project (announced star tup 4Q 2020) has the benefit of a partner with ethane export terminal experience.

Targa Resources had previously offered to construct an ethane export terminal on the Houston Ship Channel pending a willing off take partner, but none has emerged. Enterprise has also stated that they could expand their ethane export terminal capacity. Since new US East Coast terminals are difficult to get approved, the most reasonable location for expansion of USEC ethane exports would be Marcus Hook.

Global LPG Supply and Demand
About 60% of global LPG production comes from gas processing with nearly all the balance from refining. The great majority of supply growth comes from the US, Canada, the Middle East, Russia, China and India (Fig 2). Of these sources, only the China/India LPG growth is sourced from refineries, and these countries are net importers. Russia hopes to use incremental supply as domestic petrochemical feedstock, so expor ts may not grow. Thus, incremental waterborne LPG supply will come mainly from the US and the Middle East.

Asia is the only region in the world with rapid volumetric demand growth (Fig 3), and most of this growth comes from the residential/commercial market and from petrochemical feedstock demand. LPG demand in the US is flat . Propane is losing to ethane in the petrochemicals market and to natural gas in the residential/commercial market. Butane demand is mostly saturated in the refineries. The European market is mostly mature: recent demand increases have come from LPG substitution of naphtha in olefins crackers, but this market is unlikely to grow. European residential/commercial markets are mostly declining. Middle East market growth is mostly from petrochemical feedstock applications, but from a small base. Latin American demand growth is modest and is mostly from residential/commercial demand. African residential/commercial demand is growth is rapid on a percentage basis, but the overall volume is relatively small, as affordability and infrastructure remain major issues.

Residential/commercial demand is growing in Asia much more quickly than in other regions. Asia has an enormous population that is growing rapidly and is becoming increasingly wealthy. LPG availability from the US and the Middle East has improved. Perhaps the largest impact has come from governments' willingness to support LPG demand growth. For example, India and Indonesia have introduced subsidy programs to increase LPG demand for residential applications, and these countries have the second and four th largest populations in the world. Other highly populated countries such as Bangladesh and Myanmar don't have subsidy programs, but they do have relatively new legislation that allows LPG markets to grow with less government intervention.

For propane, the global growth in residential/commercial and other premium demand is not sufficient to keep up with rapidly increasing supplies, largely because the US LPG exports are mostly propane. Consequently, large amounts of propane are left for the petrochemical markets to clear. Surplus propane, coupled with strong demand for propylene, makes the new PDH units in China and elsewhere economical. However, much of the incremental residential/commercial demand in South Asia has a high frac tion of butane, thereby leaving much less butane for the chemicals markets to clear. Indeed, over the past few years during periods of high demand there have been tight butane markets that have resulted in high butane prices relative to propane.

US shale development is likely to continue to accelerate at least through the mid-2020s, resulting in a continuing increase in the availability of ethane and LPG around the world. The waterborne ethane export industry is in its nascent stages, and the extent to which China imports US ethane will have an impact on the pricing of US ethane. US LPG expor ts will also continue to increase, with propane continuing to have a large global surplus , while butane could face seasonal tightness.