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Asia's record LPG shortfall to attract increasing US exports
[SINGAPORE] Asia's supply shortfall of liquefied petroleum gas (LPG) will rise to record highs for at least the next two years, drawing ever more US exports to fill the void.
The deficit between what Asia can supply and demand for LPG will rise to a record of 1.42 million barrels per day (bpd) in 2016, surpassing last year's 1.3 million bpd, said David Wech, managing director of consultancy firm JBC Energy.
This deficit will increase to 1.5 million bpd by 2017, he added. As a result, the region may draw almost 300,000 bpd of LPG from the United States in 2016 and 340,000 bpd in 2017, said Mr Wech.
US exports to Japan, South Korea, Singapore and China, the world's largest LPG consumer, already hit a record in 2015, averaging 248,000 bpd, data from the US Energy Information Administration showed.
Importers of US LPG include Japan's Astomos Energy Corp and Eneos Globe Corp, South Korea's E1 and China's Unipec.
"Since 2009, every year has seen a new all-time high in Asia's LPG deficit due to strong LPG demand growth," said Mr Wech.
US-based Enterprise Products Partners and Phillips 66 are poised to fill Asia's demand as they have either recently expanded their export capabilities or, in the case of Phillips, will be opening a new terminal later this year.
"In the case of South Korea, around 80 to 85 per cent of the LPG imports are from the Middle East (Asia's key supplier) and 15 to 20 per cent from the US, which will likely increase its share from this year. It will be an interesting market," said an LPG consumer.
The US holds a price advantage over Middle Eastern suppliers with propane at the Mont Belvieu, Texas, hub at 43 US cents per gallon, or about US$230 a tonne, although that does not include freight for the voyage to Asia. That compares to the current contract price from Saudi Aramco at $283.
LPG is a mixture of two gases, butane and propane. Asian consumers primarily use the fuel for cooking and heating but the gas also powers cars and is used as a petrochemical feedstock.
Asia's growing dependence on US LPG may mean higher propane and butane prices for American consumers as exports pull supply away, analysts at Barclays Capital said in a March 28 note.
"As supply and demand fundamentals continue to improve due to increased export levels and domestic (US) demand, we believe ethane and propane are well positioned," said Barclays.
Asia's demand needs will steer the market direction.
The region's total LPG consumption, including the Indian subcontinent, is projected to reach 113 million tonnes in 2016, or about 3.6 million bpd, said Yanyu He, director of Natural Gas Liquids Research at IHS, adding that the region has the most acute supply shortages in the world.
This is up from 105 million tonnes in 2015 and it will grow to 121 million tonnes next year, said Mr He.
Residential and commercial users accounted for about 65 per cent of the Asian LPG market in 2015 though this will ease to about 64 per cent in 2017, said Mr He.
The petrochemical industry will drive Asian LPG demand growth to meet the increasing need for plastics, especially as a packaging material to feed the e-commerce sector.
Petrochemical consumption will account for 15 per cent of total Asian LPG usage by 2017, said IHS's Mr He, up from 11 per cent in 2015.
New specialised propane dehydrogenation (PDH) plants that use LPG to produce propylene, a precursor to plastics, that have been built recently in South Korea and China are driving that growth.
Additional petrochemical demand occurs when LPG prices drop to at least US$50 a tonne lower than naphtha, a light oil product also consumed by the industry. Currently the gap is about US$35.
Naphtha crackers can replace up to 15 per cent of their naphtha with LPG when the economics work. An average of about 750,000 tonnes of LPG a month could be used this way, said Mr He.
LPG can be extracted from gas fields and during the crude refining process. Typically, a crude oil grade will yield less than five per cent LPG when run through a distillation unit.
With a large number of natural gas fields and extensive crude distillation capacity, the Middle East has traditionally supplied Asian LPG needs.
The Middle East's LPG surplus after meeting domestic consumption, most of which will go to Asia, will tick up to 1.25 million bpd this year from 1.23 million bpd in 2015 and reach 1.26 million bpd in 2017, said Mr Wech.