Shale boom pits US LPG against Mideast in Asia

Welders work inside Westerman Companies Inc, a firm that manufactures oil tanks for the fracking industry in Bremen, Ohio, US (file). The slump in Middle East prices underscores how the North American shale gas boom is roiling energy markets around the world, helping cut fuel costs for buyers.

Yuji Okada and Tsuyoshi Inajima, Bloomberg/Tokyo

Saudi Arabia’s liquefied petroleum gas prices are headed for the worst year since the global financial crisis as record exports from the US loosen the Middle East’s hold on the Asian market.

Saudi Arabia’s monthly propane contract price, the benchmark for sales to Asia, dropped 9% this year to an average of $832 a metric tonne, according to data compiled by Bloomberg. That would be the biggest loss since 2009, when prices sank 35%. The cost of the fuel, used mostly for heating and making petrochemicals, slid 4.9% at Mont Belvieu, Texas, the US export hub.

The slump in Middle East prices underscores how the North American shale gas boom is roiling energy markets around the world, helping cut fuel costs for buyers including Japan’s Iwatani Corp and ENEOS Globe Corp, while threatening revenue for producers such as Saudi Arabian Oil Co. Japan, the biggest importer, may get 20% of its purchases from the US by 2018, from 3.5% last year, according to Japan LP Gas Association, an industry group.

“The inflow of US LPG into Asia is setting a new direction in the market,” said Osamu Fujisawa, an independent oil economist in Tokyo, who previously worked for 17 years for the Saudi state oil company, Saudi Aramco. “Supplies from the US have already been weighing on Saudi Arabia’s contract price and the downward trend will probably strengthen next year as full-scale imports from the US kick in.”

The contract, known as the CP, was set at $820 in October, 20% less than a year ago. Prices averaged about $915 in 2012 and $743 over the past five years.

Propane at Mont Belvieu cost $1.14 a gallon (about 592 a tonne) in October, 18% more than a year earlier, according to data from Liquidity Partners Commodities Research. Prices in the first 10 months averaged 96¢ a gallon, compared with about $1 in 2012. It averaged $1.08 a gallon, or $561 a tonne, over the past five years, and traded yesterday at $1.20.

“Growing LPG exports by the US have been creating a threatening situation for Saudi Arabia’s contract prices and sending them lower,” said Jun Matsuda, the president of ENEOS Globe. “Contract prices will remain under pressure from US supplies because we expect more exports.”

Net profit at Eneos Globe, the LPG venture owned by JX Nippon Oil & Energy Co, Mitsui & Co and Marubeni Corp, rose 65% to ¥5bn ($49.4mn) in the fiscal year ended in March this year, data on its website show. Shares of Iwatani, which gets more than half its revenue from the energy unit that includes LPG supplies, rose 58% this year.

LPG is a mixture of hydrocarbons including propane and butane that changes from a gaseous to liquid state when compressed or chilled. About 40% of consumption is for cooking and heating, while a third is used as a petrochemical feedstock, according to the International Energy Agency.

The US is boosting exports amid growing oil and gas output from shale formations. The country, which became a net LPG shipper for the first time last year, will continue exporting more than it imports through 2040, according to a report on US Energy Information Administration’s website.

Cheaper US supplies are unlikely to have an impact on Middle East prices for the next two to three years because export volumes are still relatively small, said Colin Shelley, a senior consultant at Singapore-based Facts Global Energy. The 1mn tonnes of LPG that the country is selling to Asia is “nothing compared to the total trading market,” of 30mn tonnes, he said.

Petrochemical demand will keep LPG markets “tight,” Saad Abdullah al-Kuwari, the chief executive of Tasweeq, Qatar’s state oil-products marketing unit, said at a conference in Doha on November 18. Asia’s LPG consumption for petrochemical use will double to 20mn tonnes through 2020 from 2010, Walt Hart, a senior research director at IHS, said in Rio de Janeiro.

A spokesman for Dhahran-based Saudi Aramco wasn’t able to comment when contacted by phone and e-mail.

Cargo volumes also will be limited by restrictions to the size of vessels that can transit the Panama Canal, according to Shelley. There are only four Very Large Gas Carriers, each holding about 40,000 tonnes of LPG, that can pass through the canal from the US to Asia, according to Japan’s industry- funded LP Gas Centre. The rest have to go via the Cape of Good Hope, boosting freight costs.

Japan imported 13.2mn tonnes in the 2012 fiscal year that ended in March, according to data compiled by the Japan LP Gas Association. About 31% was supplied by Qatar, 24% from the UAE and 15% by Saudi Arabia. The US supplied 3.5%, or 462,000 tonnes, according to the association.

Purchases of US LPG may reach 1mn tonnes in 2013, Tsutomu Yagi, the assistant general manager at Astomos Energy Corp, an LPG joint venture by Idemitsu Kosan Co and Mitsubishi Corp, said in Doha on November 19. Japan plans to buy about 3mn tonnes from the US in 2018, Tatsuhiko Yamasaki, the chairman of the Japan LP Gas Association who also heads Astomos, told reporters in Tokyo on November 6.

US LPG “will pressure contract-price setting quite significantly,” Ian Taylor, the chief executive officer of Vitol Group, the world’s biggest oil trader, said in Doha. “The US is going to be a major exporter, increasing its exports in the next few years by over 2mn tonnes per annum.”

The US exported 294,000 barrels a day of propane and propylene in August, or about 735,000 tonnes, 90% more than a year earlier, Energy Information Administration data show. Exports were a record 308,000 barrels a day in May. The country will ship as much as 9mn tonnes of LPG this year, rising to 15mn by 2015, said Michael Panas, a consultant at Poten & Partners, a shipbroker.

The nation is shipping more LPG to Asia, with exports to the Far East expected to reach at least 13% of its total liftings this year, compared with 10% in 2010, Scott Gray, a senior research director at IHS, said in Rio de Janeiro.

US propane production increased 51% since February 2011 as drillers targeted so-called wet-gas shale plays, which are rich in natural gas liquids. Output was a record 1.49mn barrels a day in the week ended Nov 1, EIA data show.

Global LPG supply increased 3% to 274mn tonnes in 2012, while consumption expanded 2% to 264mn tonnes, Matthew Evans, an analyst at Argus Media Ltd, said at a conference in London on October 2.

Including freight costs at about $180 a tonne as of August, US prices are still about $60 to $70 a tonne below Saudi Arabia’s, according to Yasuhisa Miya, a Tokyo-based senior researcher at the LP Gas Center.

US prices will become even more competitive with the expansion of the Panama canal in 2015 that will allow the transit of larger tankers, reducing freight costs to Japan to about $95 a tonne, according to the Japan LP Gas Association.  “A more dynamic contract price mechanism may be needed in order for the Middle East not to be left potentially behind,” says Vitol’s Taylor. “Propane is cheap and getting cheaper and cheaper and cheaper.”