US shale boom will boost LPG exports and bring down prices

November 04, 2013 | Commodities & Oilprice, LNG & LPG, United States & Canada

Transocean_Driller (460 x 300)London (Reuters) – A U.S. energy drilling boom is revolutionizing the niche market for liquefied petroleum gas (LPG), bringing down global prices and challenging established exporters in the Middle East.

The changes are the latest sign of the global impact of a drilling renaissance in the United States that has already hit oil and natural gas. And like oil and gas, it is U.S. producers of LPG who are set to gain most while established exporters may struggle with new competition in a suddenly altered landscape.

Unconventional oil and gas drilling, including shale gas extraction from fracking, is controversial because it requires large amounts of water and chemicals to be pumped at high pressure into the earth, and some countries such as France and Bulgaria have banned the technology.

In the United States, however, shale oil and gas has resulted in a sharp increase in production, turning the country from a large energy importer into an oil and gas exporter.

In the LPG market, which is mostly known for use of butane and propane in household devices but increasingly also in transport, analysts say that North America will vie with the Middle East as the world’s top LPG supply region this year and in 2014 at average daily production rates of around two million barrels per day (b/d).

U.S. shipments are expected to bring down global LPG prices as top Middle Eastern suppliers like Saudi Arabia and Qatar have to adjust to their new low-priced competitors.

“The stars are aligned for increased U.S. LPG exports to Asia,” U.S. energy researchers ESAI Energy said in a research note in October.

“Of the anticipated U.S. LPG surplus of nearly 350,000 b/d by 2015, about 110,000 b/d could reach Asian markets. This game-changing development will redraw global LPG trade flows and force Middle Eastern LPG exporters to lower prices,” ESAI Energy said, adding that Saudi contract prices would fall from over $70 a barrel now to $68 per barrel in 2014 and to $65 in 2015.

Although U.S. propane production from shale gas has been rising for a while, a lack of export infrastructure has kept most of the output at home, pulling U.S. prices well below international levels, but high global prices have attracted investment and U.S. export capacity is now rising fast.

Following Texas-based Enterprise Products, which announced early in October that it would build a 6 million barrel a month LPG export terminal, its local peer Phillips 66 also said last week that it would develop a $1 billion LPG export terminal at Freeport, Texas, with a capacity of 4.4 million barrels per month.

“We are looking at a rapidly changing energy landscape that presents excellent opportunities,” said Tim Taylor, executive vice president at Phillips 66.

“There are attractive markets outside of the United States for products like butane and propane,” he added.

U.S. LPG exports averaged around 148,000 b/d in 2011 and rose to 196,000 b/d last year, while exports were already up to an average of 280,000 b/d in the first seven months of 2013.

With the U.S. having too much LPG to use itself, its traditional supplier Canada is also eyeing an export terminal to serve Asia, adding to future downward price pressure and further undermining the Middle East’s market dominance in this sector.


Analysts say that the U.S. LPG export boom will be further aided by the expansion of the Panama Canal, allowing the passage of so-called very large gas carriers (VLGC) to pass through it from 2015 and reducing the cost of freight by cutting the sailing time from the U.S. to Asia by over two weeks.

“A good fundamental outlook (for) the next three years mainly due to more U.S. exports has led to more interest in (VLGC) tonnage,” Norwegian brokerage Pareto Securities said in a research note in October.

Although the main focus of U.S. LPG exports will be Asia, some analysts say that the lower freight rates U.S. exporters need to pay to ship LPG to Europe will mean that Europe and Asia will begin to compete for American supplies.

“The high cost of freight to Asian destinations means that the European arbitrage route is more attractive from a logistical point of view and this lends support to our view that U.S. LPG volumes will largely remain within the Atlantic Basin over the coming years,” researchers at JBC Energy said in a market report.