SIMON SAYS: US Butanes -- Will They Lose Their Glitz?

Submitted by Simon Hill on Sun, 06/09/2019 - 16:51
NGLs Price Comparison

Nearly all contracts I’ve seen for LPG exports out of the U.S. Gulf are written as propane loadings, with a normal butane option, but only if declared by a certain date, and then limited to half the cargo. So, has butane been demoted to the role of “second-class” citizen in the relentless growth of U.S. LPG exports?

The U.S. is one of the few markets in the world that splits mixed butanes into normal-butane and iso-butane at the fractionator, before on-selling to third parties. I was going to say don’t ask me why, but I guess it deserves a good answer and not just the obvious one! The obvious one being that iso-butane is worth more, because it’s a major part in the motor gasoline blending pool, especially the alkylation production process.

Alkylate is produced by reacting light olefins (such as propylene, butylene and amylene) with iso-butane. With a strong acid being present, such as sulphuric or hydrofluoric, we get a mixed paraffin, high octane, low-vapour pressure, gasoline blend component, otherwise known as “liquid gold”. Alkylate’s low-vapour pressure allows commingling of other high-vapour / lower octane compounds, while high octane makes for a higher performance motor gasoline, as a higher compression ratio extracts more power from your engine. It also has T50 and T90 boiling ranges ideal in the production of ethanol-gasoline, and lastly, they contain no toxics such as Sulphur, aromatics or olefins.

The other reason they separate the iso-butane from the normal-butane in the U.S., is because it is the U.S. I mean it’s a market in itself, so why not independently cater for the localized iso-butane demand, from the 20+ U.S. refineries who have built alkylation units. In fact, in the U.S. they even commercially isomerize normal-butane to make more iso-butane, if the differential between the two is economically viable. Elsewhere in the world it’s a process kept in-house, within the refinery fence. Mixed butanes are brought in and disappear somewhere into the gasoline they produce.

I did love selling high iso-content mixed butane to ARCO Chemical in Fos, France, many years ago, to make a gasoline high octane / lead replacement component, another of my favourite words, methyl tertiary butyl ether (MTBE). I even remember the buyer was Jacques Vogt, a winner of the frozen canal skating races in Amsterdam in his youth. Well, with MTBE being water soluble it contaminates groundwater if it leaks, therefore it was phased out in the late 1990s. I’ll just have to make do with PDH as my favourite acronym!

By the way I don’t see iso-butane being exported, but you can add it to the normal- butane if your receiver needs a minimum iso content in the mix. Oh yes, you have to pay the iso price for it!

Normal butane is also an excellent motor gasoline blend stock, mainly due to its high-octane rating. But it is limited by having a high vapour pressure. Basically, when it gets warm it starts to vaporize and amounts can be lost to the atmosphere. Not good for the environment and not good for the motorist. It’s also not good news for the Refiner, he used to buy or value butane as a weight and sold it as a volume - a gallon or a litre - locking in a significant financial uplift.  

So, if I was a butane producer, I should be laughing all the way to the bank. But there’s a limit on how much butane, iso and normal, can be consumed by the “up-market” end of the barrel, namely motor gasoline. As the foot continues to be applied to the NGL production accelerator pedal, more normal butane will have to find a home and probably outside of the U.S.

Now that the Summer season is upon us, and NGL production increases just keep rolling on, the seasonal characteristic of butane exists, similar to propane, where demand is higher in the winter and lower in the summer – not any news to experienced NGL market participants.  What is news to NGL market players though, or at least quite curious, is the current spread between normal butane and propane, sitting near 3.5 cpg.

Historically, this spread typically holds above 10 cpg. However, over the last two years, we’ve seen it move lower, even under 5 cpg.  What is going on?

Normal butane’s a fickle commodity. It’s either the most loved, or undesired.  Right now, normal butane is trying to find demand, in a market where there’s limited alternative outlets to the motor gasoline pool. The U.S. petchem sector is being incentivized to use normal butane, but crackers are already running at historically high butane consumption levels, somewhere around 150 Mbbl/d.   The upside is probably maxed out already, as crackers are geared more towards ethane consumption these days, and cracking normal butane yields greater volumes of co-products, that are more difficult to market, with some, such as benzene and butadiene, proving environmentally challenging.

We are therefore back again to exports?  But Butane is a whole different ball game to propane. The butane ARB is difficult to trade, as hedging is limited by insufficient liquidity in the paper market. Although you can submit bids/offers for propane or butane in the Ginga Window, it’s nearly all propane deals that get done and rarely butane by itself.

So, the two mechanisms that make physical and paper worlds meet, therefore enabling the ARB to operate, just doesn’t happen for butane! Maybe that will change as more butane is offered up for export.

Figure 2

But don’t get me wrong, there is a regular flow of butane exported from the U.S. In fact, 290 MBbls/d were exported in 2018 (6.42 MM Mt/yr) and so far this year, an estimated 215 MBbls/d (7.27 MM Mt/yr) has been sent out. Asia has been a growing destination, but as I explain below, it faces some challenges. Markets that have historically used Belvieu pricing, such as the Caribbean, Mexico and most South American are also importers, but this demand is fairly static.  So, while purity and Y-grade supply continues to grow, don’t be surprised to see the normal butane versus propane spreads, and the normal butane to WTI price ratio, continue to test historical lows over the following months. Butane just needs to find new opportunities.

China has built up its own butane blending capability, especially alkylate, but uncertainties over future motor gasoline specifications is putting growth on hold, as is the current U.S. / China trade war. The door also opens and closes for cargoes into Indonesia. Demand will grow but the freight differential makes U.S. movements uneconomical. India, even more so, with cargoes purchased being very much ad hoc opportunities. North West Europe is balanced, while extra butane demand in the Mediterranean depends a lot on Turkey. (See 06/06/19 blog – Can Turkey’s LPG market grow?) As has been the case with Marcus Hook in the past, there will be an increased desire to store normal butane over the summer for use in the winter. The problem is that motor gasoline demand is unlikely to grow at a rate equivalent to the growth of butane production. It’s going to be a tough time ahead for the C4s!

Figure 3