The isobutane market has a traditional self-correcting mechanism whenever the market gets oversupplied - the iso vs. normal spread declines, the merchant isomerization units shut down, and the market moves back into balance. But there is a potential problem ahead for this orderly, self-correcting marketplace – shale. As high-BTU, “wet” shale gas production continues to push NGL volumes from gas plants ever higher, the supply of isobutane will be increasing proportionally. The math is simple. The more gas plant production of isobutane, the less merchant isomerization will be needed. Or is that really true? Could increasing demand for alkylate combined with increasing availability of propylene from dehydrogenation absorb enough isobutane to keep the merchant isomerization units running at high utilization rates? Today in our series on isobutane and isomerization we’ll look at the major isomerization centers, the major players, increasing export patterns and likely scenarios for the disposition of surplus isobutane supplies.
Recap from Last Time
In Part I of this series we examined the molecular characteristics that differentiate isobutane from its cousin, normal butane, historical price differentials between the two “C4” natural gas liquids, and the basic operations of a butamer (isomerization) unit that converts normal butane to isobutane. That got us to a discussion of isobutane supply and demand, and some grousing about quirks in the isobutane statistics provided by EIA. The problem with the EIA statistics is that they combine production from natural gas plants and production from merchant isomerization units into a single total production number. That is no big deal when gas plant production is relatively stable. But in the world of wet shale gas and growing supplies of NGLs – the world of today and the next few years – the conglomeration of statistics masks changes in gas plant production growth versus changes in utilization of the merchant isomerization units. That worries isobutane watchers, because it is entirely possible that increases in gas plant supplies will take significant market share from those merchant units, resulting in narrow iso vs. normal differentials and low isomerization unit utilization rates. So let’s see if it is possible to look deeper into the numbers to handicap how this might play out. First, the merchant isomerization players.
The Merchant isomerization Players
As we covered in Part I, most butane isomerization generally takes place within the hydrocracking processing in refineries. The commercial isomerization units (“isoms”) are typically part of a midstream fractionation or butane splitting facility. As you probably guessed, they are all part of our midstream who’s who that we’ve talked about in a number of blogs, including Can Mont Belvieu Handle the Supply Surge. Here are the biggies:
Enterprise, Mont Belvieu, Texas: Enterprise is the largest isom player in Mont Belvieu and thus operates the largest commercial isom complex in the U.S. The nameplate capacity of Enterprise’s complex is 116 Mb/d. Theirs’ is also the only facility with waterborne connections making international butane supplies and iso demand an option when economics permit. And they do export isobutane to the tune of three to five cargos per month, almost always in lots of 36,000 barrels, and almost always destined for Mexico. Of the six million barrels of butanes that were exported from the gulf coast last year, about 30% of the total was isobutane, mostly from Enterprise docks to Mexico (these figures from our friends at Waterborne Energy).
There is something else we know about the Enterprise isom complex. According to the Enterprise 10-K, “on a weighted-average basis, utilization rates for this (isomerization) facility were approximately 81.9%, 87.1% and 76.7% during the years ended December 31, 2012, 2011 and 2010, respectively”. Thus the production of isobutane from the Enterprise isom has averaged 95 Mb/d over the past three years
Oneok, Conway Kansas: Oneok owns and operates the only commercial isomerization facility in the Conway area and are the big players in the region. Oneok’s unit has the capacity to handle 9 Mb/d and is connected to their Conway storage, fractionator and is also connected to Mont Belvieu by pipeline.
Plains All American, Shafter, California: This isomerization unit was originally established through a partnership between Andrews Petroleum and Texaco in the late 1980’s to help alleviate the predictable and costly isobutane shortage the West Coast refineries were facing during alky season. Texaco had three refineries in the west coast as well as several gas plants and like most, were net long normal butane and short isobutane. Volumes weren’t huge and neither was the initial isom unit, but it worked and it proved economical for all the stakeholders at the time. It launched commercial isomerization on the west coast. Today, PAA’s Shafter facility includes storage, terminaling, processing, fractionation and the butane isomerization capacity is now 14 Mb/d.
Inergy, Bakersfield, California: And just across town from the Plains Shafter plant is one more commercial isom unit which resides at the North Coles Levee plant owned by Inergy (previously EOTT, originally Arco). They have the ability to handle 8 Mb/d and also provide tank car and truck terminaling, storage and fractionation. It is understood that this unit is primarily supplied from Oxy’s production in the area.
Aux Sable, Channahon, Illinois: Aux Sable Liquid Products (ASLP) owns and operates the Channahon, Illinois facility which includes fractionation and a 7 Mb/d bpd isomerization plant.
Add up all the numbers and you get the total in the table below – 154 Mb/d of isomerization capacity. Now for some guestimation. If we assume that the Enterprise complex will run at about the average rate of the past three years, that gives us 95 Mb/d of production. The West Coast isomerization market is brutally competitive, with Los Angeles refineries producing more of their own isobutane demand to avoid the trip to Bakersfield to access Inergy or Plains. That has utilization of those units collectively cut back. Combining that with what we understand about the other units, we estimate that total production of those four facilities is about 20 Mb/d out of 38 Mb/d capacity.
(click table to enlarge)
Gas Plant Isobutane versus Merchant Isobutane
In 2012, EIA reported total isobutane production from natural gas processing plants of 225 Mb/d. There was another 15 Mb/d of supply from refineries (shipped from refineries) and imports. Total NGLs (Y-grade) produced from gas processing plants in 2012 averaged 2,400 Mb/d. Thus, from the perspective of EIA statistics, isobutane was 225/2400 = 9.4% of the NGL barrel. However, if we deduct the merchant isomerization volume of 105 Mb/d from the total gas plant supply we get 225 – 105 = 120 Mb/d. That is only 105/2400 = 5% of the NGL barrel. That number sounds low by a percent or two, based on traditional yields from gas plants. However, with ethane volumes as a percent of the total up so significantly [1], 5% gas plant isobutane might be pretty close to the right number. For now, let’s go with it. That means we are looking at 53% gas plant isobutane supply and 47% merchant isomerization supply.
What Does the Future Bring for Isobutane?
Our friends at Bentek show total mixed NGL production from gas processing plants increasing from the 2,400 Mb/d referenced above to just under 3,900 Mb/d by 2018. If isobutane stays at 5% of the NGL barrel, that would get total gas plant production from 120 last year to 195, or an increase of 75 Mb/d. Add to that 195 Mb/d the miscellaneous other supplies of 15 Mb/d, and we get a total supply number of 210 Mb/d.
Demand for isobutane (including alkylation, petchem, and ‘exotic’ uses) in 2012 essentially equaled total supply of 240 Mb/d. Thus the math is pretty obvious. If demand does not change, and supply increases to 210 Mb/d, then the need for merchant isomerization drops from 105 Mb/d to 30 Mb/d. Clearly that would not be a good thing for merchant isoms. Another obvious implication is that a lot of normal butane would not be converted to isobutane, increasing the anticipated glut of normal. (Most of that normal butane surplus is expected to be exported, but that’s another story.)
Is that where we are headed? Shut down of most of the merchant isomerization capacity? It could happen that way. However, there is another possibility. As normal butane surpluses increase, the relative prices of that NGL will likely fall. At the same time, the oversupply of isobutane will result in a narrow iso vs. normal spread. Consequently isobutane will be cheap. And we all know that refiners and petrochemicals alike can’t resist a cheap feedstock.
We mentioned in Part I that the largest demand segment for isobutane is alkylation, and that alkylation requires two feedstocks – isobutane and propylene. The construction of a number of propane dehydrogenation units has been announced to produce increasing supplies of on purpose propylene. The combination of that additional supply plus lower isobutane prices might look pretty good to refiners. Just a modest increase in alkylation capacity could chew up the isobutane surplus pretty quickly. We’ll be watching those price differentials and refinery project announcements carefully to see what happens next.
[1] NGLs from shale tend to contain a higher proportion of ethane. Instead of 42% like we use in our Frac Spread model, the number tends toward 50% to sometimes 60%+, The higher relative percentage of ethane would reduce the percentage of other NGLs proportionately, including isobutane.
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