Drowning in LPG

Anyone checking regularly on the oil price must blush from time to time. One of the consequences of the lower oil price is that the world is currently drowning in other oil-related products as well and there is worse to come as some of those effects spill over onto the non-oil patch.

Fast focus on LPG. It’s a mix of essentially two different hydrocarbons… What do I say; you are all pros of the business so I skip the blather.

One of the most exciting developments is concentrated in North America. Yes, we all know the stories of the US becoming the next LNG superpower. LNG is methane gas that has been cooled to minus 161 degrees Celsius so it drops liquid and then it is transported in huge tankers (some of them have domes as tanks) over the oceans. LNG gets all the limelight and the great attention (plus the big bucks) today but what happens in LPG is no less thrilling.

Already the very first shale drillers knew that the resulting gas was very wet depending on the formation which means it is high in Natural Gas Liquids. This has by now gone all the way to oil which has become the sought-after resource – gas has transformed from the stuff those drillers went for to be the sidekick today.

This means that essentially, shale drillers respond to what happens in the oil market and deal with the rest as consequences. That’s not very different from classical oil drillers who have drilled for oil and flared gas for ages. LPG is one of those consequential products. The rationale is that the prized commodity gets all the attention and the sidekicks are here to improve cash flow at best – at worst, they are a burden to the balance sheet.

In the last 10 years, the US has transformed from an importer of LPG into one of its biggest exporters. The North American continental market is oversupplied to the point where storage is bursting at the seams and traders lack sufficient capacity to game the market properly. Gaming requires overcapacity and North American LPG is hitting tank tops and capacity constraints on the transmission grid.

Export has gone from being a theoretical possibility to being a lifesaving necessity for drilling to continue. If the US shale producers don’t export and the domestic market cannot absorb the volumes anymore, they will be stranded with huge volumes of LPG which essentially means dumping it for free on the market to free up capacity as otherwise, they would have to shut in upstream capacity. This is neither very easy to do nor is it economically sound.

Cannot happen? Just remember what happened to the sulfur market when the Qatari super-trains started up. The price for sulfur in India (a big sulfur market) went negative for some years which means the Qataris had to pay to get rid of the stuff.

So the pumps have to keep pouring oil and hence will continue swamping the LPG market in this part of the world and this ripples through into the entire Atlantic Basin as this is the market on the doorstep.

Fortunately for the US, the biggest import market in Asia – China – had just built some new petrochemical plants that can surely make good use of the produced LPG. It’s cheaper than Naphtha so it’s clear where LPG should head to. But China shows strong signs of running out of steam as an economy. The currency has been devalued and the stock market is in tatters and there is a strong feeling that China’s time in the heavens might be finally over. This downturn does not look like it would be short-term.

In Saudi Arabia in the meanwhile, ethane has been used for ages as feedstock as it was plentiful and cheap. But it’s being replaced slowly by Propane and Butane as they are a better feedstock for Petchems. But Qatar and the Emirates have built up massive Petchem industries as well and they also wanted to climb the ladder of the value chain. And much of this Petchem is flooding markets in Asia and Europe. It’s another deluge of sorts.

And all this massive oversupply in everything meets markets that are in decline. Yes, there are growing markets out there but they tend to be tiny in comparison to monsters like China. We come to realize that China has not been very honest about its growth figures for quite a while and even if we should have been aware of them cheating, we did not want to believe it as our projections for – everything – depended on them.

Let’s be clear on one thing. The world could not sustain breakneck growth forever. One day those not stratospheric but rather spatial projections had to be exposed for what they are. Massively overblown. Now the world is in shrinking mode and given how long we have been on the growth drug, it’s going to take a little while.

It must also be clear that if monster markets the size of China cut back one single percentage point in energy use, this means companies going out of business. None of the currently strongly growing markets can absorb that overhang.

We can also climb the ladder as much as we want on the value chain, one day someone will have to buy and use all the stuff that the world wants to churn out not to make money but to live. The real-world consumer’s capacity to consume is the ultimate gauge around which everything gravitates in the end. No fiddling with spreadsheets will change that.

So if there are plenty of new petrochemical plants but nobody needs their products, some of those Asian and Middle Eastern producers will have to shut in and stop producing which in turn pulls the demand for LPG down. Plus all the leftover Naphtha will also look for a place to go and there is ever more product from all places producing flammables. All OPEC countries are wincing in pain from the lower oil prices and their national economies are often at the breaking point forcing them to push ever more products into the market which in turn further suppresses prices.

It’s a vicious cycle and breaking free will produce calamities.

Back to the US. There is more and more LPG and Latin America, as well as Europe (which currently is the US primary export market), are full to the brim as well. The former powerhouse Brazil is in even worse shape than China and it’s hard to see how all this new product could ever be absorbed.

If the domestic market cannot absorb LPG anymore, Latin America and Europe fail to absorb further volumes, and weak or no growth in China means that Petrochemicals won’t be as priced anymore as they were just 2 years ago, then there is a real problem. Because production will not end and overcapacity will become so extreme that producers will face the stark choice to give LPG away for free or even pay penalties to get rid of it.

Investments in shale fields have to bear fruit one way or another which means that they have to keep producing oil and they also have to keep innovating to be able to live with ever lower prices and some products including LPG will become worthless – or essentially worthless.

The only solution will be to hunt for the few physical importers of LPG that don’t use it for fickle Petrochemicals but that use it for far less sophisticated and way more stable ends – home heating and cooking. This is essentially the case in some Latin American countries, in sub-Saharan Africa, and in some places in Asia.

But those markets are not endless, they are fragmented and beset by never-ending bottlenecks and they sure will be at saturation point pretty soon. Time to get the nose to the grindstone and make the business developers gear up. It’s a hunt for the buyers again – or soon will be.

There is a saying in Germany. The last one is going to be bitten by the hounds. Don’t be last then.