Long-term Shift In LPG Cracking Economics


lpg.jpgSource of picture: the truth about cars


By John Richardson

WHEN my fellow blogger Malini Hariharan once asked a particularly unhelpful individual who used to track polyethylene (PE) markets what was going on, his only response was “conditions are volatile”.

And so as you kick-off this fine and sunny morning (at least it is here in Singapore), here is some further useful advice for you: Conditions are becoming even more volatile.

But unlike the individual referred to above, in a series of blog posts over the coming weeks we will endeavour to explain exactly why pricing markets have become even harder to predict. We believe that old tools of analysis need to be revised and old assumptions challenged.

We are going to start with liquefied petroleum gas (LPG) and how unexpected shortages have curtailed the length of the usual propane and butane “cracking season”.

Every summer, when demand for LPG for heating in the northern hemisphere falls, cracker operators that have invested in the flexibility to change feeds often reduce naphtha consumption in favour of LPG. Cracker operators in Japan, South Korea and Singapore have, for example, invested in this flexibility.

But as these two recent graphs from the ICIS pricing Ethylene Margin Report show (click below to view), earlier this summer LPG cracking didn’t make economic sense




So we talked to oil, gas and refining consultants Purvin & Gertz and they gave us the following reasons why this happened:

1.) Refinery operating rates globally are constrained due to weak oil-product demand, despite the story the financial industry is spinning about booming demand

2.) Asian refineries were undergoing heavy maintenance programmes

3.) The economic crisis resulted in delays to liquefied natural gas (LNG) projects, thereby reducing the extra availability of propane and butane co or by-product that needs to be extracted from the LNG before it is shipped

4.) The well-documented OPEC oil quotas that have limited availability of associated ethane gas have also done the same for associated propane and butane

5.) Petrochemicals demand for LPG has increased due to the increased cracking of propane and butane resulting from ethane shortages, and the start-up of the three propane dehydrogenation (PDH) to polypropylene (PP) projects in Saudi Arabia. This is only a small part of the overall picture, BUT constrained LPG supply in Saudi Arabia – evidence of which came from a recent analysts report about Yansab – is one reason why it is over-simplistic to talk about new supply flooding the market without adding a few important qualifications

The LPG season has belatedly begun thanks to Asian refineries returning from turnarounds and LPG exports from a new gas-separation plant in Abu Dhabi, which is feeding the Borouge II cracker complex with ethane, add Purvin & Gertz.

But clearly there are some new variables for flexible-feed cracker operators that look as if they are here for the long-term and therefore need further study.

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