SIMON SAYS: E might = MC2, but LPG Exports don’t always equal Export Capacity!

Submitted by Simon Hill on Wed, 11/06/2019 - 17:00
E might = MC2, but LPG Exports don’t always equal Export Capacity!

In yesterday’s SIMON SAYS I told the post shale story for U.S. LPG exports, especially those from the U.S. Gulf coast, and how once everybody had signed up to buy at high terminal fees, the bottom suddenly caved in on the market in the summer of 2016, and it was here to stay for longer than anyone ever wanted. The result was that Chinese end-users began to cancel, or try to renegotiate their term contracts, as they could take advantage of cheaper Middle East product and discounted naphtha. That’s putting it kindly, what was really happening was wholesale reneging!

Some disputes became open altercations, in public, via email, and ultimately in some cases in the law courts. Targa went to court with China Soft Packaging Group. The Chinese claimed that fat profits had been made by all players in 2015, and therefore with such a dramatic change around in the market, suppliers should be willing to renegotiate. I was always told in my early days, of trying to sell smaller lots of LPG to the Chinese, that to a Chinese buyer he will only start negotiating once the contract is signed! But there were many injured parties, with the likes of Targa, Naftomar, and Petredec all left with ships waiting before loading, releasing the cargo, or trying to deliver the ship. A Singapore based “sleeve’ company SK Chemical Trading, unrelated to the South Korean importer, cancelled supply contracts with some of the main traders as soon as they had been reneged on by Zhejiang Shaoxing Sanyuan.

The sensibility and compromise of the LPG industry had been lost. A lot of companies have suffered significant losses since 2016, not only due to Chinese customers reneging directly or indirectly, but also because of unsold contracts out of U.S. Gulf coast exporters, negotiated for a  minimum of 5 year terms, and at levels in the 12-13 cents/ gallon range. Some of the exporters have agreed to renegotiate, but only in exchange for extended contracts or extra liftings. For most of the players caught up in the melee it has been a difficult period, no body came out unscathed. P66, late to the export party, had to then make the best of a bad show. But where does that leave us today as we look forward to 2020.

Since 2016 and the start-up of P66’s Freeport terminal, export volumes have been surging ahead hitting 1.1 million Bbls/d out of the four U.S. Gulf terminals. For the last six months export capacity has been pretty much maxed out, with the recent surge in U.S. exports emanating from the second quarter start-up of Energy Transfer’s Mariner East 2 pipeline, and exports out of their Marcus Hook facility on the U.S. east coast. But we’ve had announcements, especially from Enterprise, that they will be increasing capacity at their Houston Ship Channel facility by 175 M Bbls/d, the equivalent again of a Targa, or P66, or Energy Transfer Nederland. I questioned on Monday whether this extra capacity will be unleashed in the market, and although it’s hardly been seen over the last couple of months, there are those who believe they are seeing the signs in November, and Enterprise have said the expansion has been completed.

The other constraint associated with getting more tons out and over the dock for export, has been the issues related to takeaway capability, although you would think that if the export capacity was actually there, then more volume would have been exported, instead of ending up in higher stocks. But without doubt, the lack of pipeline and fractionation capacity does have an impact. Enterprise has about 760 M Bbls/d of fractionation capacity at its Mont Belvieu complex. Their new fractionation train 10, with 150 M Bbls/d of capacity was still being shown as due for completion this quarter at the recent quarterly earnings call, and we therefore have to assume it will be up and going very soon. They also have train 11 due in the second quarter 2020, again with 150 M bbls/d of capacity. These two trains will give Enterprise something in the region of 5 million Mt of LPG production. If you believe you need fractionated purity product and export capacity, then the first half of 2020 looks as if it’s on course. In addition, the start-up of the Shin Oak pipeline at 250 M Bbls/d of Y-grade in the first quarter this year, building up to 550 M Bbls/d by the end of 2019, is potentially providing an extra 9.1 million Mt. These are all huge figures and are for only one company, Enterprise, albeit the largest operator. Enterprise are keen to say that they have takeaway contracts in place to fully utilize the expansion capacity. With this in mind, there is a further dock expansion in the works for completion in the third quarter 2020. In international tonnage terms, Enterprise are expanding their dock to handle about 32 million Mt of LPG per annum, that’s double today’s volume. But again, let me re-iterate that this is capacity. One thing seems to have worked; the announcements appear to have frightened away prospective new entrants to the export business!

Targa in the meantime have brought into operation their 300 M Bbls/d Grand Prix NGLs pipeline, from the Permian basin to Mont Belvieu, during the second quarter this year, and should be running at 200 M Bbls/d by the end of the year. With over half of the Y-grade consisting of LPG, once fractionated it will account for 3.25 million Mt. The pipeline also coincided with their train 6 fractionator, bringing their total frac capacity up to 550 M Bbls/d, producing about 9 million Mt of exportable LPG. Targa are due to bring on further trains with 7 and 8 slated for the end of the first quarter and third quarters next year, respectively, both will have a further 110 M Bbls/d capacity. So, Targa’s overall export capacity should be upwards of 12.5 Million Mt/ year. All it will then require is an expansion to the dock facilities, and a programme is already being implemented at the Galena Park terminal on the Houston Ship Channel. A 20 inch pipeline has already been made operational, allowing for more butane to be exported, but extra refrigeration capacity is not going to be on-stream until the third quarter of 2020, so propane will have to wait its turn. But if all goes to plan, we would expect that by later next year there should be enough capacity to export up to 15 million Mt, which is double today’s achievable volumes, and we are all saying we’re already at full capacity.

There are further question marks on whether either party will be able to reach full capacity with actual exports. Both parties have been lobbying the Houston Ship Channel authorities to increase ship movement, especially two-way navigation of the channel. This appears to be going in favour of the exporters, from what was said by both at the recent PFAA convention in Lake Charles, Louisiana. However, both terminals are also increasing the export of other products, such as petrochemicals and crude.

It looks as if I will have to finish this blog in a third part tomorrow, Fridays are no longer the same, but I think the conclusion is worth waiting for. The big question is going to be the call on production, especially exportable, and there’s no better year to start than 2020. If production doesn’t meet expectation then it will be very interesting times ahead.