US propane supply falls amid new export capacity, high cracking levels

By Amanda Townsley, consultant, Petrochemicals & NGLs
Genscape

With the recent startup of the latest LPG export facility, Mariner South, the US Gulf Coast has the infrastructure to support LPG exports of approximately 20 MMbbl a month, most of which is propane. Capacity has more than tripled since 2013, encouraged by cheap Mont Belvieu propane, which was priced at a large discount to Northwest Europe and the Far East values during 2012 and 2013. Between the Mariner South project and the Targa expansion last fall, we could see propane exports up 8 MMbbl per month this spring vs. last.

Over the last few months, propane has been trading close to “arb parity,” with the spread between Northwest Europe and Mont Belvieu Propane barely covering freight and variable costs to get across the docks. Such narrow margins should reduce exports over time by offering no incentive for traders to bid on spot cargo slots offered by terminal operators.

Last week, strength in international pricing – particularly the Far East – widened the arb out again, calling into question whether the global market is looking for more propane from US shores. This has even helped US propane price strengthen vs. other domestic feedstocks and crude oil.

Despite this recent strength, US propane is still discounted significantly vs. other domestic feedstocks, particularly ethane, making it the preferred feed for most ethylene crackers in the Gulf Coast. Genscape estimates that cracker demand will consume approximately 150–200 MMbpd additional propane (or over 5 MMbbl a month) above what crackers were consuming this past summer. 

As you may have heard, however, domestic production is growing. Genscape’s NGL Production Forecast from December put propane production up 140 MMbpd, or 4 MMbbl per month for Q2 and Q3 2015 vs. 2014. While this is no small volume, it represents a fraction of the new demand.

The chart below utilizes Genscape’s NGL Production Forecast, and these increases in propane demand reflect what balances would look like through the end of the year, assuming incentives to crack and export remain intact.

The 95% utilization rate scenario on USGC export facilities is applied to an apparent capacity at Targa and Enterprise of 220 and 260 Mbpd, respectively, and nine cargos/month of purity propane beginning in March at Mariner South for a total export volume of approximately 620 Mbpd. The 85% utilization scenario reflected exports of 550 Mbpd, just four more cargos a month than we saw near the end of 2014. The balances below do not include the next round of export capacity enhancements, the first of which should be Enterprise at the end of 2015. 

In this high cracking environment, it’s unlikely that the US has enough propane to keep the floodgates (and the arb) wide open, regardless of whether the market wants to consume it. 

This chart is made with the following assumptions: PADD 1 exports 0 through March and at 2014 levels for the remainder of the year; average weather and other demand; 450–500 Mbpd of cracking.

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