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Ohio Utica Shale

Middle East losing grip on Asian markets due to U.S. exports

By Bob Downing Published: November 22, 2013

From Bloomberg News:

By Yuji Okada and Tsuyoshi Inajima

Nov. 22 (Bloomberg) -- Saudi Arabia’s liquefied petroleum gas prices are headed for the worst year since the global financial crisis as record exports from the U.S. loosen the Middle East’s hold on the Asian market.

Saudi Arabia’s monthly propane contract price, the benchmark for sales to Asia, dropped 9 percent this year to an average of $832 a metric ton, according to data compiled by Bloomberg. That would be the biggest loss since 2009, when prices sank 35 percent. The cost of the fuel, used mostly for heating and making petrochemicals, slid 4.9 percent at Mont Belvieu, Texas, the U.S. export hub.

The slump in Middle East prices underscores how the North American shale gas boom is roiling energy markets around the world, helping cut fuel costs for buyers including Japan’s Iwatani Corp. and ENEOS Globe Corp., while threatening revenue for producers such as Saudi Arabian Oil Co. Japan, the biggest importer, may get 20 percent of its purchases from the U.S. by 2018, from 3.5 percent last year, according to Japan LP Gas Association, an industry group.

"The inflow of U.S. LPG into Asia is setting a new direction in the market," said Osamu Fujisawa, an independent oil economist in Tokyo, who previously worked for 17 years for the Saudi state oil company known as Saudi Aramco. "Supplies from the U.S. have already been weighing on Saudi Arabia’s contract price and the downward trend will probably strengthen next year as full-scale imports from the U.S. kick in."

Price Slide

The contract, known as the CP, was set at $820 in October, 20 percent less than a year ago. Prices averaged about $915 in 2012 and $743 over the past five years.

Propane at Mont Belvieu cost $1.14 a gallon (about 592 a ton) in October, 18 percent more than a year earlier, according to data from Liquidity Partners Commodities Research. Prices in the first 10 months averaged 96 cents a gallon, compared with about $1 in 2012. It averaged $1.08 a gallon, or $561 a ton, over the past five years, and traded yesterday at $1.20.

"Growing LPG exports by the U.S. have been creating a threatening situation for Saudi Arabia’s contract prices and sending them lower," said Jun Matsuda, the president of ENEOS Globe. "Contract prices will remain under pressure from U.S. supplies because we expect more exports."

U.S. Exports

Net profit at Eneos Globe, the LPG venture owned by JX Nippon Oil & Energy Co., Mitsui & Co. and Marubeni Corp., rose 65 percent to 5 billion yen ($49.4 million) in the fiscal year ended in March this year, data on its website show. Shares of Iwatani, which gets more than half its revenue from the energy unit that includes LPG supplies, rose 58 percent this year.

LPG is a mixture of hydrocarbons including propane and butane that changes from a gaseous to liquid state when compressed or chilled. About 40 percent of consumption is for cooking and heating, while a third is used as a petrochemical feedstock, according to the International Energy Agency.

The U.S. is boosting exports amid growing oil and gas output from shale formations. The country, which became a net LPG shipper for the first time last year, will continue exporting more than it imports through 2040, according to a report on U.S. Energy Information Administration’s website.

Limited Shipments

Cheaper U.S. supplies are unlikely to have an impact on Middle East prices for the next two to three years because export volumes are still relatively small, said Colin Shelley, a senior consultant at Singapore-based Facts Global Energy. The 1 million tons of LPG that the country is selling to Asia is "nothing compared to the total trading market," of 30 million tons, he said.

Petrochemical demand will keep LPG markets "tight," Saad Abdullah Al Kuwari, the chief executive of Tasweeq, Qatar’s state oil-products marketing unit, said at a conference in Doha on Nov. 18. Asia’s LPG consumption for petrochemical use will double to 20 million tons through 2020 from 2010, Walt Hart, a senior research director at IHS Inc., said in Rio de Janeiro.

A spokesman for Dhahran-based Saudi Aramco wasn’t able to comment when contacted by phone and e-mail.

Cargo volumes also will be limited by restrictions to the size of vessels that can transit the Panama Canal, according to Shelley. There are only four Very Large Gas Carriers, each holding about 40,000 tons of LPG, that can pass through the canal from the U.S. to Asia, according to Japan’s industry- funded LP Gas Center. The rest have to go via the Cape of Good Hope, boosting freight costs.

Gas Association

Japan imported 13.2 million tons in the 2012 fiscal year that ended in March, according to data compiled by the Japan LP Gas Association. About 31 percent was supplied by Qatar, 24 percent from the United Arab Emirates and 15 percent by Saudi Arabia. The U.S. supplied 3.5 percent, or 462,000 tons, according to the association.

Purchases of U.S. LPG may reach 1 million tons in 2013, Tsutomu Yagi, the assistant general manager at Astomos Energy Corp., an LPG joint venture by Idemitsu Kosan Co. and Mitsubishi Corp., said in Doha on Nov. 19. Japan plans to buy about 3 million tons from the U.S. in 2018, Tatsuhiko Yamasaki, the chairman of the Japan LP Gas Association who also heads Astomos, told reporters in Tokyo on Nov. 6.

U.S. LPG "will pressure contract-price setting quite significantly," Ian Taylor, the chief executive officer of Vitol Group, the world’s biggest oil trader, said in Doha. "The U.S. is going to be a major exporter, increasing its exports in the next few years by over 2 million tons per annum."

Propane Production

The U.S. exported 294,000 barrels a day of propane and propylene in August, or about 735,000 tons, 90 percent more than a year earlier, Energy Information Administration data show. Exports were a record 308,000 barrels a day in May. The country will ship as much as 9 million tons of LPG this year, rising to 15 million by 2015, said Michael Panas, a consultant at Poten & Partners, a shipbroker.

U.S. propane production increased 51 percent since February 2011 as drillers targeted so-called wet-gas shale plays, which are rich in natural gas liquids. Output was a record 1.49 million barrels a day in the week ended Nov. 1, EIA data show.

Global LPG supply increased 3 percent to 274 million tons in 2012, while consumption expanded 2 percent to 264 million tons, Matthew Evans, an analyst at Argus Media Ltd., said at a conference in London on Oct. 2.

Including freight costs at about $180 a ton as of August, U.S. prices are still about $60 to $70 a ton below Saudi Arabia’s, according to Yasuhisa Miya, a Tokyo-based senior researcher at the LP Gas Center.

U.S. prices will become even more competitive with the expansion of the Panama canal in 2015 that will allow the transit of larger tankers, reducing freight costs to Japan to about $95 a ton, according to the Japan LP Gas Association.

"A more dynamic contract price mechanism may be needed in order for the Middle East not to be left potentially behind," says Vitol’s Taylor. "Propane is cheap and getting cheaper and cheaper and cheaper."

--With assistance from Ann Koh in Singapore, Morgane Lapeyre in London, Robert Tuttle in Doha and Jacob Adelman in Tokyo. Editors: Alexander Kwiatkowski, Yee Kai Pin

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