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Let’s Get Cracking - How Petrochemicals set NGL Prices – Part II

Yesterday we started our series on the economics of petrochemical feedstocks.  With NGLs driving the natural gas market, it is critically important to understand the factors that influence NGL prices.  The #1 factor is the petrochemical market that consumes more than half of all NGL production and 100% of the ethane.  In Let’s Get Cracking we did a brief overview of olefin crackers including how they work, what they make and where they are located.  We also introduced the fundamental fact of feedstock acquisition of the ethylene cracker industry:  the best feedstock is the one that will produce the highest margin possible, after deducting byproduct credits.  On the surface this seems simple – just make your product out of the cheapest stuff possible.  But below the surface it can get quite complex.  Of course, deep dives into energy analytics are what we live for here at RBN, so let’s get into the details. 

First we need to talk about yields -- how much of which products are produced when you crack various feedstocks.  Take ethane for example.  If you crack a pound of ethane (cracker people talk in pounds), the ethylene yield is about 78%.  That means one pound of ethane cracked equals 0.78 pounds of ethylene.  But that’s not all.  The process also yields about 3% propylene and 19% other stuff.  That stuff includes butadiene, benzene, fuel gas (hydrogen, methane) and a variety of other chemicals. 

The yield numbers for propane are quite different.  The ethylene yield for propane is only about 42%, considerably less than for ethane.  But you get much more of one very important byproduct – propylene.  The propylene yield is 17%.  You get 41% of the other stuff.  Other feedstocks including normal butane, natural gasoline, condensates, naphthas and gas oils have different yield patterns depending on the carbon content of the molecule being cracked, the configuration of the specific cracker, and a variety of other issues.  As a general rule, the heavier the feedstock the less ethane it yields and the higher the yield of other stuff.

Obviously the cracker wants to make the slate of products that can be sold for the highest total value, given furnace and downstream processing unit hardware constraints.  Within the ethylene industry this is typically measured in terms of pounds of ethylene produced – since that is the most important product that these units are built to manufacture.  So that gets to the fundamental formula for calculating olefin cracker margins:

[Price of ethylene per pound] – [Cost of feedstock per pound of ethylene produced] + [value of byproduct credits per pound of ethylene produced]

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