Contraction Scenario

Most of the increase in U.S. propane production in recent years has come from plants processing natural gas to extract natural gas liquids (NGLs). The rich (wet) gas those plants process is either produced with crude as associated gas or from wet gas wells that target NGLs. In either case propane supplies are produced regardless of U.S. demand – and that demand is relatively static although subject to significant weather related seasonal variation. There are two important consequences of this supply/demand imbalance with important implications for the propane market.  First, the U.S. can produce about twice the propane it needs, so the surplus must be exported.  Second, most production growth is next door to the largest propane demand regions in the country. Today we describe the scenarios used to build our model of propane supply and demand used to analyze these developments.

Massive infrastructure investments in petrochemical steam crackers and export terminals for propane, butane and ethane are in the works.  But the market has changed since the investment decisions for many of these facilities were made.  Instead of the low ethane prices the petrochemical market is enjoying today (about 19 cents/Gal), prices could ramp up to 50 cents/Gal by 2020 as new steam crackers and ethane export facilities come online.  If ethane prices increase and crude oil prices remain below $65/bbl, the feedstock cost advantage of ethane versus naphtha that the new petrochemical facilities expected likely would not materialize.  Lower crude oil prices would also cap production growth of all NGLs, limiting the volumes to be exported through the new terminals.  Today we review Part 2 of our Drill Down Report on NGL Infrastructure.