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Growing propane export capacity seen leveling the international playing field

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Growing propane export capacity seen leveling the international playing field

Asproduction of propane and other natural gas liquids soared in recent years dueto increased development of shale resources, export capacity was built in orderto provide a takeaway option for producers. Export capacity growth is now setto outpace production, which will level the playing field between prices in theU.S. and international destinations.

Exports jump five-fold, twice

"We'rea globally interconnected market now. We can no longer look at the forecaststhat may or may not happen in six or eight weeks and make some changes in ourbusiness," Charles Robertson, president of Twin Feathers Consulting Inc.,told propane marketers at the National Propane Gas Association's SoutheasternConvention & International Propane Expo in Nashville on April 8. "Soas we're becoming a massive exporting machine from the U.S. doing about 50% ofthe world demand, it's critically important that you understand the dynamics ofthis change in our position."

Charles Robertson, president of Twin Feathers Consulting Inc.

Source: SNL Energy, an offering of S&P Global Market Intelligence

TheU.S. Energy Information Administration reported on April 4 that the level of exports of propaneand propylene jumped to a record 866 Mbbl/d in January from a previous recordof 751 Mbbl/d in December 2015.

Thegain was a result of increased export capacity, with starting up its expanded export terminal on the Houston Ship Channel late in2015, according to the company on Dec. 30, 2015.

From1995 to 2005, exports of propane from the U.S. averaged around 36 Mbbl/d, accordingto data from the EIA. That jumped to an average of over 196 Mbbl/d between 2006and 2015.

"Between1995 and 2005, we were barely exporting anything, and then in the next decade,we had a five-fold jump," Robertson said. "And then you look at wherewe are currently at 850,000 to 900,000 barrels a day of exports. That's almostanother five-fold increase in that period."

Robertsonsaid that retail buyers used to be a large segment of propane demand and hasnow gone from being more than half of the total demand to less than a third.

"IfI'm a producer and I'm looking to sell product into that marketplace, who do Iwant to sell it to?" Robertson said. "Someone who takes equal barrelsin the summer as in the winter, or someone that I've got to buy barrels, savethem and then provide more product for you [if you need it]."

Prices react

Theprice of Lone Star pipeline grade propane at Mont Belvieu, Texas, jumped fromaround 33 cents per gallon in the week ended Jan. 15 to around 46.65 cents pergallon in the week ended March 11, according to data from S&P Global MarketIntelligence. Prices at the hub in Conway, Kan., rebounded from 29.50 cents pergallon to 42.35 cents per gallon during the same period.

"Iused to think of the propane market in the United States as 50% consumer, 50%petrochemical markets," Mike Sloan, a principal at ICF International, saidat the NPGA Convention. "Now exports are greater than either thepetrochemical market or the consumer market."

Sloannoted that the startup of DowChemical Co.'s propane dehydrogenation (PDH) facility andEnterprise's expanded export terminal have caused inventories to drop quicklyover the past winter despite temperatures being above normal.

Mike Sloan, principal at ICF International,

Source: SNL Energy, an offering of S&P Global Market Intelligence

"Withthe capacity that is online right now, we're exporting about 12 1/2 billiongallons of propane per year, and we expect a couple more facilities to comeonline by the end of this year," Sloan said. "The facilities that areexpected to come online will add about 30% to 40% to that, bringing thepotential to export closer to 17 billion gallons of propane."

Sloansaid that the rise in exports and petrochemical demand for propane could createa reasonable chance that inventories fall to levels that are at or belowfive-year minimum levels by the end of this year. If that were to occur, itcould affect how propane is supplied to the consumer market.

"It'snot that propane is not going to be available," Sloan said. "Therewill always be the ability to bid propane away from petrochemicals or exportmarkets, but doing so could be very expensive."

Long-term effects

Withpropane export capacity continuing to grow, many U.S. consumers may worry thatsending half of U.S. supply to overseas markets will raise domestic prices.

"Itdoesn't mean that it's all going to be exported, and in fact, it can't beexported because we won't have enough propane to fully utilize all of theexport facilities that are being developed," Sloan said. "Instead,what's going to happen is there's going to be a significant chunk of exportcapacity that's not utilized."

Theeffect of the increase in exports will likely benefit international consumerswho have traditionally paid more for their supply.

"Thatamount of un-utilized export capacity really means that the U.S. market willbecome very tightly linked with international propane markets, and the amountof exports will depend on what's happening in terms of growth in internationalmarkets," Sloan said.

Exportvolumes will not just be held back by the fact that the U.S. doesn't haveenough to export. The narrowing price spread with international markets alongwith competition from international suppliers may also add some pressure onexports.

"Whatare the actual economics that are taking place?" J.D. Buss, tradingmanager at Twin Feathers, said at the NPGA Convention. "When we add backterminaling and freight fees, we're negative when we land that vessel back inEurope. I'm negative when I land that vessel in the Far East."

SNL Image

J.D. Buss, trading manager at Twin Feathers Consulting Inc.

Source: SNL Energy, an offering of S&P Global Market Intelligence

Thespread between the price in the Far East and Mont Belvieu or Northwest Europeand Mont Belvieu was fairly wide a couple years ago and helped to facilitatedemand for exports from the U.S. After terminal and freight fees weresubtracted, shipping propane to those markets from the U.S. was stillprofitable.

Asthe spreads have narrowed over the last few months, the cost to ship propane toEurope and the Far East has occasionally turned to losses after terminal andfreight fees are subtracted, which has resulted in less demand for exports.There have been several indications that exports may fall from the levelreported for January, according to Buss.

"Areally interesting counter-discussion to that is, if prices get too high ...what takes place if other global players say 'I don't know if I want tocontinue taking that product,'" Buss said. "Everyone says, these areiron-clad contracts and they're going to go. Well, my experience has been thatnothing's guaranteed."

Twocargoes were canceled in the past month, according to Buss.

Suppliesfrom the U.S. will continue to face competition from producers around the worldas well.

"There'sa lot of other supply sources that are starting to come up," Buss said.Yes, the U.S. has increased and is predicted to increase, but it doesn't meanthat other nations in the world are going to stop, and I think that's one thingthat we have to keep in mind."

Anothereffect of the export boom is the growing importance of Mont Belvieu as aninternational trading hub. Enterprise Products' CEO Jim Teague has said thatbuyers of U.S. exports want to diversify their supply and want volume that istied to a transparent pricingpoint.

Busssaid that there has been a massive increase in the number of futures contractsthat are being traded at or cleared through NYMEX. He showed open interestrising from around 20,000 contracts in mid-2014 to over 120,000 contracts inearly 2016.

"Whatwe see right now is that increase in Belvieu trading is helping people to getmore liquidity, which is great, but it's also potentially generating morevolatility in the underlying market, which is difficult," Buss said."What we also see is that there's an opportunity that not all of thatsupply is going to actually come from the U.S. It may not all flow from here,but it will all be priced from here."

SNL Energy is an offering ofS&P Global Market Intelligence. Market prices and included industry dataare current as of the time of publication and are subject to change. For moredetailed market data, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.