I read somewhere this week that after the trials and tribulations of the first month of a new decade, the last few days of January have been “very unremarkable”, but I beg to differ. To me the most important announcement for months came to the surface, specifically impacting LPG, not some knock-on effect of an action or decision made outside of our industry. To set the scene, it was 1000 hours on Wall Street, 0900 hours in Houston, the Wall Street Journal, CNBC, Bloomberg and the Motley Fool, to name just a few, had their pens, electronic transcribers and microphones at the ready. “Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Enterprise Products Partners LP Earnings Conference Call.” As always the show was turned over to Jim Teague, for LPG this is a big show, even though sometimes we have to decipher between the lines, or spot the odd specific comment, it doesn’t really come any huger these days in the LPG world!
The words I had been waiting for were “LPG export expansion”, and I didn’t have to wait long, may be 300 words or less. Then we were told by Jim Teague that the recent LPG export capacity expansion had been up and running throughout the third quarter of 2019, but the words that followed need to be decoded. He said that the Enterprise terminal had been contracted “to a targeted level”, but didn’t confirm the expansion of the facilities to the daily volumes that we had been led to believe were going to result. Instead it was as a result of “through efficient scheduling” that had allowed for an increase in dock utilization. In September 2018, Enterprise had announced that construction was already under way to increase LPG loading capacity at the Enterprise Hydrocarbon Terminal (EHT) by 175 M Bbls/d, or about 5 million barrels per month. To me that’s the equivalent of about 10 extra VLGCs per month. This would bring total LPG export capacity at EHT to 720 M Bbls/d, in the region of 21 million barrels per month, and circa 40 VLGCs or their equivalent. That is the same as adding a new Targa, a new P66, a new Marcus Hook, but unless I’m missing something it’s not there.
I looked back at January 2019, where the month resulted in a 4 week average of 1,012 M Bbls/d compared to January 2020, rolling in at 1,253 M Bbls/d. Okay, that shows a big increase, but it was before Mariner East 2 volumes started to be exported out of Marcus Hook, and the small increases in exports from both P66 out of Freeport and Targa. The average over the 15 EIA weekly data releases in the second quarter of 2019, post Marcus Hook expansion, was 1,197 M Bbls/d. Let’s not forget that the biggest encouragement for any exporter to utilise their maximum capacity is going to be marginal terminal fees, and for January 2020 slots the levels have been in double figures for the whole month, reaching over 30 cents/ gallon at their peak. So come on, 10 extra VLGCs or their equivalent from Enterprise, it just doesn’t add up.
I know I keep repeating myself, but this is the most important issue today in the world of LPG. The future direction of the LPG market is reliant on U.S. Exports, Exports and more Exports. You see, it wasn’t supposed to stop there. In July last year Enterprise also announced that in addition to the phase one, 175 M Bbls/d expansion, there would be a further enlargement of 260 M Bbls/d constructed, and this new capacity would be in service in the third quarter of this year, 2020. This development was due to enhance EHT’s nameplate capacity above 1 million Bbls/d, or approximately 33 million Bbls per month, which is the equivalent of 33 million Mt per annum. Therefore in just one single year Enterprise’s LPG export capacity would be increased by 13.25 million Mt. There were no new LPG docks, just “utilising the latest technology to modify and expand existing facilities”, with the main “driver and catalyst” being the “clarity and certainty” of recent laws ensuring two-way traffic along the Houston Ship Channel. Phase one has appeared with something of a whimper, if at all. Phase two became a little clearer on Thursday morning eastern U.S. time.
Enterprise made known that there were delays in the delivery of a number of projects, especially the two 150 M Bbls/d fractionators, FRAC 10 and FRAC 11, being built in Mont Belvieu, which were now being slated for start-up operations a quarter later than scheduled. Now this is important in itself, and I’m sure I’ll be revisiting its impact, together with the inevitable Y-grade build-up in the near future, but for me what followed was more dramatic, the fact that the phase two of the LPG export expansion at EHT was also being delayed, beyond the third quarter of 2020, to “at least 2021” and “subject to final engineering schedules”, with links to the delays in the delivery of the two new fractionators, especially FRAC 11. The words “at least” have a lot more meaning to me than if they had used the words “at most”, it suggests engineering hurdles and may be even market uncertainty starting to take a grip. Do we need the capacity, are we able to fill the capacity? These must be questions that senior Enterprise executives are asking themselves. It’s therefore the most important statement for LPG this week. The next few weeks will no doubt tell us more, but for now it’s something that all players need to keep in their minds.
As I look ahead again into 2020, I feel the buzz words are going to continue to be “export capacity constraints”. We are now seeing the seasonality influence on the market in Asia, exacerbated by the concerns over the spread of the corona-virus, it’s impact on demand in China, closure of ports and a feeling of potential programming havoc to come. We are then seeing potential cargoes starting to over-hang the market, and limited demand outside China, due to the mild Asian winter. Then there is the Saudi Aramco CP backwardation from February to March, currently trading on the paper markets at nearly $150/ Mt, the delta between propane and butane, and no clarity in the U.S. origin LPG to China trade tariff issues, currently overshadowed by the impact of the corona-virus and Chinese New Year holidays. ARBs are now contracting fast, especially with propane in the U.S. staying afloat on the back of a larger than expected draw in last week’s EIA propane stocks, while Asian numbers slip. Dare I say that with U.S. propane netbacks having taken the brunt of the fall, reaching levels not much higher than mid-single digits, the spur to export more is not going to be there over the next few weeks, not until the new market equilibriums are reached.
Until we start to get out of the winter season, and that cannot be more than a few weeks away in the U.S., we are not going to be able to forecast the starting point of the U.S. propane “build” season, but inventories are already exceeding five year averages, and without bulging exports, U.S. propane prices will have to keep going further down. No wonder the 2020 rush to build fractionation and export capacity has somewhat been delayed, and maybe it won’t be that long before we see projects ultimately withdrawn.