Rancagua, Chile, lies well off South America’s well-trod tourist path, some 75 miles south of Chile’s bustling and very chic capital, Santiago. You can get there from here but it takes some doing.

It’s a blue-collar town. Copper mining in the nearby Andean foothills, which rise from the city’s eastern suburbs, and thousands of acres of surrounding vineyards that produce Cabernet, Merlot and Carmenère grapes, which become top-quality wines, support the local economy. Homes are modest, the natives friendly. No Joe Sixpack here: Visitors can expect a bottle or two of very good, locally produced vintages to appear even for a modest lunch, dinner or the “once,” Chileans’ traditional, late-night snack.

Part of Rancagua locals’ daily routine in every neighborhood is the passing of a flatbed truck or pickup loaded with LP gas tanks, which look similar to that thing under your patio grill. The vendors ring a bell as they drive along—think ice cream truck—to alert everyone in advance of their arrival so residents can haul out an empty tank and swap it for a full one.

Such neighborhood LPG sales are hardly unique to this place. Thousands of villages, towns and major cities across the globe that lack natural gas service rely on LPG.

And increasingly, the liquefied propane/butane mix in those tanks worldwide is coming from U.S. wells.

Good to great
There never was a ban on U.S. petroleum product exports. Foreign markets for LPG—as well as gasoline, diesel, jet fuel and marine bunkers—have gone from good to great as the domestic industry strives to find new markets for rising crude oil and natural gas production. The U.S. passed Russia and Saudi Arabia during the third quarter to become the world’s largest crude producer, with more than 11 million barrels per day (MMbbl/d) in September, and has been the world’s largest gas producer for some time.

More recently, the downstream end of the U.S. energy chain added ethane and LNG to that a la carte product menu.

Consider: The U.S. Energy Information Administration (EIA) said in its Petroleum Supply Monthly report issued at the end of September that finished motor gasoline exports were up 17% in July, year-over-year (yoy). They rose a substantial 20.3% from the prior month. Numbers like that are understandably “positive,” Credit Suisse said in an investment analysis, in contrast to domestic gasoline demand that was flat in first-half 2018 compared with the prior-year period.

“Recall that Gulf Coast refiners moving product to Latin American markets prevents gasoline gluts and supports higher PADD I to III margins,” Credit Suisse noted.

Over and under
Credit Suisse had more information to report. For another major petroleum product, it said, “We have seen a clear trend by which weekly data is overestimating domestic demand and underestimating jet fuel export demand.”

“A combination of low oil prices, a rapidly expanding middle class in Asia and booming freight markets driven by expanding world trade and e-commerce are fueling increased demand for jet fuel worldwide,” IHS Market said in a fourth-quarter research report. “However, that growth does have potential risks that could hamper demand, namely a greater penetration of sustainable aviation fuels and efficiency gains….”

The report estimated worldwide jet fuel demand will rise from around 8% of total refined product demand in 2017 to more than 10% by 2040. The global market will reach more than 9.5 MMbbl/d by 2040, compared with demand of nearly 7.45 MMbbl/d this year.

“Thanks largely to low oil prices and strong growth in air travel, particularly in Asia, jet fuel is a fast-growing product, with global jet fuel demand growth comfortably exceeding 4% in the last two years,” said Louise Vertz, director, refining and marketing research at IHS Markit, and lead author of the IHS Markit analysis. “In a refined-fuel market that has had sluggish annual growth of just shy of 1.5% overall, that is a bright spot for refiners and is one of the few refined products we expect to see gain consistent demand growth through 2040. However, there are some potential challenges that could inhibit that demand growth, particularly increased market penetration of sustainable aviation fuels and increased fleet efficiency.”

Developed-nation, OECD markets currently claim 58% of the jet fuel market. That share will decline to about 48% as non-OECD market growth continues, driven by Asian growth, according to IHS.

The advantages
The U.S. has two things working in its favor as it strives to cut a bigger and bigger slice of the worldwide product sales pie:

  • Its swelling production from the shale plays; and
  • The world’s largest and most sophisticated refining industry, coupled with rapidly growing gas liquefaction infrastructure.

The nation’s energy industry can produce crude, refine it and ship it around the world at a lower cost than potential competitors can. On the gas side, the first liquefaction operations were low-cost, bolt-on projects that made use of existing docks and tankage originally intended for gas import operations built before the shale gale hit. Even greenfield LNG operations coming online next year and in 2020 have access to the nation’s well-developed gas pipeline grid and utility services not found abroad.

Overall, U.S. midstream infrastructure beats anything the rest of the world has and gets a lot of the credit for creating that cost advantage.

The challenges
The nation also faces two challenges to product exports, Bob Broxson, managing director in BDO USA’s energy disputes practice, told Midstream Business.

“One of the barriers the U.S. has is getting sufficient infrastructure in place to get all the products that we have to the right locations,” Broxson said. “We have a significant amount of crude oil production growth in the U.S. but we don’t have the infrastructure to move all of that crude oil to refineries.

Pipes and terminals are in place—but not always the right place.

“The other is competition. We don’t know exactly what OPEC will do from an output standpoint. We know that our production continues to grow and we see some shortfall in what OPEC is doing. But we don’t know if that is due to a lack of cooperation or a production issue, or what that could be,” he added.

The growing export trade creates opportunities, and that brings predictable growth in M&A activity and capex budgets. For example at the end of the third quarter, Marathon Petroleum Corp.’s MPLX LP midstream subsidiary purchased what it will call its Mt. Airy Terminal on the Mississippi River from Pin Oak Holdings LLC for $450 million in cash and debt. It’s near Marathon’s big Garyville, La., refinery.

MPLX ranks No. 8 on the Midstream Business Midstream 50 list of the sector’s largest publicly held firms.

“This acquisition provides an excellent platform for MPLX, as production growth and refining output increase the requirement for additional export capacity," MPLX President Michael J. Hennigan said in the firm’s purchase announcement. “With a prime location on the Mississippi River and proximity to over 2 MMbbl/d of refining capacity [nearby], this terminal will serve as a platform to meet growing export needs, expand our third-party business, and give MPLX tremendous flexibility to help its customers meet upcoming International Maritime Organization (IMO) fuel standards.”

Mt Airy has 4 MMbbl of third-party leased storage capacity and a 120,000-barrels-per-day (Mbbl/d) capacity loading dock. MPLX noted the terminal could expand storage to 10 MMbbl/d and add a second dock of equal capacity.

Meanwhile another big player, the Midstream 50’s No. 5-ranked Enterprise Products Partners LP (EPD), announced the addition of a new NGL fractionator and expansion of its Enterprise Hydrocarbons Terminal (EHT) on the Houston Ship Channel. The fractionator will have a capacity of 150 Mbbl/d, increasing EPD’s total Mont Belvieu fractionation capacity to 905 Mbbl/d. The export dock will add 175 Mbbl/d of loading capacity, enabling it to load a very large gas carrier in roughly three days.

And, early in the fourth quarter, supermajor Chevron Corp. told Reuters it’s seriously considering building a refinery on the Houston Ship Channel, or buying an existing plant for expansion and modification. The plant would be tuned to process light sweet shale crudes—unusual since much of the Gulf Coast’s existing refining capacity needs heavy sour feedstocks.

Distillate downturn
Distillate leads U.S. petroleum product exports. “Unlike motor gasoline, which is used almost exclusively for transportation, distillate fuel has a variety of uses, including as a heating fuel in homes and businesses, as a fuel for certain industrial processes, and as a transportation fuel for both light- and heavy-duty vehicles,” the EIA noted in a recent report. Some 27% of the nation’s distillate production went abroad in 2017, although distillate exports fell slightly in the first half of 2018 from 2017 levels.

“Distillate exports were a disappointment” in the first half, according to a Tudor, Pickering, Holt & Co. (TPH) report, which pointed out “the culprit here is Europe,” where tightening environmental laws restrict the use of diesel engines in cars and trucks. Some of that loss was made up through Latin American and Mexican purchases.

“Distillate exports had a big year last year (+17%) so the comp is tough, but this is certainly an area to monitor going forward,” TPH noted.

Latin America is a good market to be in, according to a recent review of that region’s product demand trends by Hart Energy’s Stratas Advisors.

“Latin American petroleum product consumption is projected to grow at an annual average rate of 1.7% CAGR [compound annual growth rate] through 2025, to a total of 10.72 MMbbl/d. [Overall] demand for light transportation fuels—gasoline, middle distillate and jet fuel—will grow nearly 1.8% CAGR from 2016 to 2025,” it noted.

However, watch for a significant uptick in distillate sales in future years, according to EIA and industry analysts, thanks to a new marine fuel mandate (see adjoining story).

Gasoline’s spark

In contrast, gasoline exports have enjoyed “solid growth,” TPH said, elaborating on the trends noted above. “The star of the show [in May numbers] was once again Mexico, which accounted for 58% of U.S. gasoline exports in the month and 68% of the yoy growth. Planned and unplanned refinery outages in Mexico were up approximately +75% yoy in the first half of the year, stimulating demand for U.S. barrels.”

BDO’s Broxson added that “close to 60% of all gasoline exported from the U.S. goes to Mexico with the remainder essentially going to South and Central America.”

Indeed, Mexico is not alone in its refining challenges, and a recent Credit Suisse report to investors revealed more information.

“Given South American refining systems continue to struggle, we expect product exports to remain elevated,” Credit Suisse advised investors in that report.

Credit Suisse was not the only firm examining the problem.

Contributing to technological and volumetric handicaps, South American product markets have been hit very hard by the “meltdown” in Venezuela’s refining sector, as an RBN Energy study put it.

“Venezuela’s national oil company PDVSA—previously a dominant player in the region—has left refineries and storage terminals underutilized and starved of investment. U.S. Gulf Coast refineries have partially filled the gap by increasing product exports to the region, but an opportunity now exists for private investment to fill the refining and storage void left by PDVSA, and also to meet new demand for low-sulfur bunker fuel arising from stricter [IMO] shipping regulations, which will come into effect in January 2020,” RBN said.

Venezuela is not alone in its struggles to maintain refining capacity, although its problems may be the greatest. The problem is not confined to that part of the world. For example, Oilprice.com recently offered a grim look at Ukraine’s refineries.

“Ukraine’s oil sector has remained in tantalizing agony, as only one out of the country’s six refineries is currently functioning (at a 10% utilization rate) and most of the products supply [have been] taken over by neighboring countries. All this with no end in sight. Almost every refinery was built with some sort of Russian involvement—as an owner, co-investor or crude supplier—yet after 2014, against the background of unprecedented antagonism between Ukraine and Russia, Russian companies have left the country for good. Now the question is: Who will step into the vacant spot? So far, it seems that no one is willing to,” Oilprice said.

So with many other out-of-date and poorly maintained refineries limping along around the world, the top-flight U.S. Gulf Coast refineries are likely to take ever-larger chunks of the world’s petroleum product market, according to industry observers.

Tipsy gas sales

The domestic debate over the ethanol content of U.S. retail gasoline could impact motor fuel sales abroad, Turner, Mason & Co. noted in a third-quarter report. A plan to permit domestic motor fuel sales at the pump with 15% alcohol content year-round, approved by President Trump in October, is expected to further slow any increase in U.S. reformulated blendstock for oxygenate blending (RBOB) demand. And refiners will be looking for new markets abroad.

“An argument against the waiver by refiners is that the higher the ethanol content, the less fuel the refiners will produce through their refinery. This is a real argument, and volumes might seem small until you consider the amount of gasoline consumed in the U.S. Gasoline consumption in the U.S. is on the order of 9 MMbbl/d to 9.5 MMbbl/d. And 5% of that is over 450 Mbbl/d,” Turner Mason said of RBOB demand.

China’s market
China offers an important and growing fuels market, according to TPH.

“Data from China Customs showed crude imports of 8.5 MMbbl/d in July 2018, a +1% increase month-over-month and a +5% increase yoy,” it said. In addition to China’s economic growth, new tax laws have cut the already weak economics for dozens of simple “teapot” refineries that lack reforming or catalytic cracking capacity.

“Estimated teapot utilization dropped considerably to 58% from 63% as refiners have dialed back due to recent tax changes negatively impacting economics,” the report added.

China will add 900 Mbbl/d of crude distillation capacity late this year and in early 2019, but the Asian powerhouse will see transport fuel productions grow less than many expect, according to ESAI Energy’s China Watch, published early in the fourth quarter. “Most notably, ESAI Energy projects China’s overall diesel production could grow by 50 Mbbl/d or less in 2019. The growth of China’s supply of middle distillate and overall transport fuel output has implications for Asian product markets and China’s least sophisticated independent refineries struggling to remain viable in the domestic market.”

The publication added that two new refineries will focus on petrochemicals rather than fuels. Hengli Petrochemical and Zhejiang Petrochemical, each with 400 Mbbl/d of distillation capacity, are configured to produce a total volume of 8.5 million tons of paraxylene with transport fuels produced only as byproducts.

“The transport fuel component will be more heavily weighted toward gasoline and jet fuel, yet the new refineries will produce only about half the diesel that a typical refinery of the same size would produce. Moreover, ESAI Energy expects supply from the new projects to displace some production of other domestic refineries.

“Competition from the new projects could be the last straw for some independent refiners that are already hit by shrinking demand, rising crude prices, new tax rules, and increasingly stringent environmental measures,” said Yao Wu, ESAI China analyst of the teapots. “Added supply from sophisticated new players will add to the economic pressure on the vulnerable refiners, forcing some to curb production of diesel and other products.”

Ethane and more

The NGL market for ethane, propane, butane and natural gas is strong and getting stronger, according to many observers.

“As compared with gasoline and refined products, most of the LPG that is exported from the U.S. goes to Asian markets including Japan, China, South Korea and Singapore,” Broxson added. “Mexico is a large importer of LPG, as well. U.S. exports of LPG basically doubled between 2015 and 2017. According to the EIA, 90% of these exports are from Gulf Coast ports.”

In addition to the well-established export markets for propane and butane, the U.S. has a growing business in shipping its abundant ethane production abroad, backing out naphtha and other petrochemical feedstocks. East Daley took a long look at ethane exports in a September research report after a lengthy discussion of surging domestic demand for ethane to support new domestic petrochemical capacity, primarily around the Gulf Coast.

“In addition to increased domestic cracker demand, Gulf Coast ethane exports have reached new highs this year … New domestic demand and growing exports have drawn significantly on Gulf Coast ethane stocks, which are down 10 MMbbl, or 20%, from the start of 2018 through June,” the report said.

“Higher ethane prices likely provide upside to midstream companies, like Targa Resources, DCP Midstream, Williams and Enterprise Products Partners … Companies with NGL pipelines to Mont Belvieu [Texas NGL hub], such as ONEOK, Enterprise Products and Energy Transfer Partners, may also benefit as higher ethane prices result in more ethane recovery and therefore more NGL volumes on the pipelines.”

“U.S. demand growth has slowed below the rate of production growth, forcing all incremental volume to be exported,” East Daley said in another report. “This trend can be seen … as Houston, the primary export port due to its proximity to Mont Belvieu, has increased export volumes to historic highs reaching 900 Mbbl/d in July.”

In the middle

As the world’s demand for hydrocarbon fuels and feedstocks grows, the U.S. midstream—which appears as wellheads in the Permian and Bakken and also as the bell-ringing door-to-door sellers of retail LPG in Rancagua’s streets—will play a crucial role in 2019 and beyond.

Broxson emphasized midstream infrastructure is key to meeting the world’s demand for more refined products. But “midstream infrastructure” means more than gas plants and pipes.

“We have to think docks and terminals,” he said. “I would consider that a part of the midstream, you have to have the terminals to go along with pipeline expansion, etc.,” to get product to customers. “It comes down to access at the port.”

Paul Hart can be reached at pdhart@hartenergy.com or 713-260-6427.

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