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(Can't) Give It Away, Part 2 - How Edmonton Got Rid of Its Butane Surplus

Offer any energy commodity at a low-enough price and buyers will surface, as long as there’s a way to get that liquid or gas from where it’s being sold to where it’s being used or put on a boat for export. That’s been the recent experience of the butane market in Western Canada, where a perfect storm of events last fall caused butane prices in Edmonton, AB, to freefall to near zero. But things have turned around, at least for now. Today, we take a look at the dramatic recovery of the Edmonton butane market and what might lie ahead.

Markets always find a way to clear. That’s a commodity market truism usually uttered when catastrophe appears to be looming. In Edmonton this past spring, the fear was that the seriously oversupplied butane market might be the exception to this rule. When we last looked at the Western Canadian natural gas liquids (NGLs) market a few months ago in Part 1 of this series, butane prices had been in a prolonged slump since the fall of 2018, when they had tumbled to near zero as the region’s butane inventories built to record levels. Last fall’s problems can be attributed primarily to insufficient demand, compounded by logistical challenges. To recap, Alberta’s butane production historically has gone to four main consumers: crude oil blenders, export buyers, Keyera’s Alberta EnviroFuels (AEF) plant (which converts butane to iso-octane), and to local and regional refiners, including in Washington State and Minnesota. Western Canada’s crude blenders use butane as a diluent for heavy crude oil to reduce its viscosity and enable easier transport through pipelines; the blending market accounts for more than 50% of daily production. The rest goes to refiners, who use butane seasonally as they make winter-grade gasoline, to the export market and to AEF.

The fall-2018 period proved particularly punishing for the Western Canadian butane market. Refineries were in fall turnaround mode — that’s one of two typical refinery maintenance periods; the other is in the spring. During the fall turnaround, refiners prepare to switch to making winter gasoline and also may schedule needed upgrades and repairs. Crude oil blender demand was tepid. A scheduled maintenance outage at Keyera’s AEF plant was curtailing demand. And rail-loading capacity for exporting the product was tight — rail being the chief path out of town. (There also are two pipelines that carry away butane mixed with other products: Pembina’s Alliance Pipeline, which ships natural gas mixed with NGLs, and Enbridge’s Line 1 petroleum pipeline, which also batches mixed NGLs.) The weaker demand from crude oil blenders, refiners and AEF led to the inventory build. At their September 1, 2018 peak, Western Canada butane stocks stood at 6.7 MMbbl (orange line using the left axis in Figure 1), or 46% over the five-year average of previous highs. (Canada’s National Energy Board, or NEB, reports volumes as of the first of the month.) There seemed to be no sign of reprieve for producers from the butane surplus and weak prices.

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