The Other Gas

We all know about LNG. You know, liquefied natural gas, the stuff you freeze to minus 162? Celsius so it becomes a liquid and you can ship it in dome-shaped tankers to all parts of the world and make a profit on the price differential. The Middle East, where gas is dirt cheap, is the world’s biggest producer, and most of it goes to Europe or the Far East, where gas is very expensive. It’s a lucrative trade, and it’s been around for a long time.

Now, thanks to the shale boom, it’s America’s turn to cash in. LNG has been hailed as the answer to the U.S.’s oversupply of natural gas. Export the excess supply and pocket the difference! New export liquefaction facilities are being licensed and built along the Texas and Louisiana coasts at an astonishing rate. Gas is almost as cheap to produce in the U.S. as it is in the Middle East, and it won’t be long, futurists predict, before the U.S. becomes the world’s leading exporter of LNG.

But U.S. exports of LNG are at least a year away and probably more. And a big question looms: Should they be transported in U.S.-flag ships? The U.S. maritime industry is anxious to see that question answered in the affirmative, and why not? Think of how many new jobs it would create and the benefits it would bring to the overall economy, not to mention the national security benefits of having our own LNG vessels. 

But the reality is there are no U.S.-flag LNG carriers and none has been built in at least 30 years. The few U.S. yards that could build them have their hands full turning out tankers for the shale oil trade and container ships (some of them powered by, yes, LNG) for the U.S.-Puerto Rico trade. So it’s likely that, at best, a compromise will be reached specifying that a small percentage of LNG exports be reserved for U.S.-flag ships, if we can build them in time.

LPG to the Rescue

All of which brings us to LPG, the other gas. Why wait for the promise of LNG when you can profit from LPG right now? The U.S. is already exporting more than 500,000 barrels of LPG a day, and that number is growing. No, none of it is carried in U.S.-flag ships because there are no U.S.-flag LPG carriers.

What is LPG? Good question, because I had never heard of it either. All the talk was of LNG. LPG stands for liquefied petroleum gas. It’s a byproduct of both oil refining and natural gas extraction. It’s sometimes referred to as natural gas liquids (NGLs) or “wet gas.” It’s mainly propane or butane or their derivatives like ethane. It has multiple uses such as heating and cooking and as a feedstock for petrochemicals. Most people in South America and Asia and Africa use it for heating their homes and cooking their food, and it’s ubiquitous in Europe as well. Even here in the U.S. propane is a popular substitute for oil or natural gas in home-heating, and we all use it as a fuel for grilling.  

LPG can also be used as a fuel for automobiles and buses, and you may have seen a passing city bus or school bus with the words “Powered by LPG” stenciled on the LPG storage tank on its roof. LPG as a fuel is economical and efficient and offers all the clean-burning benefits associated with both LNG and natural gas.

But the real beauty of LPG is its ease of use. It doesn’t have to be refrigerated down to minus 162? Celsius like LNG. It’s a gas, but it liquefies easily and can be transported in lightly pressurized containers. No need for sophisticated, multibillion-dollar liquefaction and regasification facilities. And the global market for LPG is much larger than the market for LNG – about 30 percent larger, in fact. So it’s an even bigger opportunity.

Booming Export Market

Here’s the best news: The world can’t seem to get enough U.S. LPG. Right now about half the country’s exports go to Central and South America, with Mexico being the biggest consumer. Europe – the Netherlands, in particular, of all places – is second, and Asia a distant third. 

When the expanded Panama Canal is completed in early 2016, however, shipments to Asia will grow exponentially. Why? Because the new canal can accommodate the largest LPG carriers, called VLGCs (Very Large Gas Carriers) and capable of carrying upwards of 500,000 barrels, which will no longer have to go around Cape Horn. That will cut the time it takes to go from the U.S. Gulf Coast to Asia by more than two weeks, making it comparable to Middle East-Asia voyages and reducing overall shipping costs by 50 percent.

Wells Fargo is projecting a 25 percent increase in U.S. exports of LPG over the next three years. It likely will be more than that. New export facilities along the Gulf Coast, 13 in all, will triple capacity from the current level of 500,000 barrels per day to 1,500,000 bpd by 2016. Remember, the U.S. is already exporting in excess of 500,000 bpd of LPG, ninety percent of it from the Gulf Coast. So the region is already operating at or above capacity.

Enterprise Products, Targa Resources and Phillips 66 are planning the biggest expansions. Enterprise is boosting capacity at its Houston Ship Channel facility from 250,000 bpd to more than 500,000 by the end of next year and recently announced a two-for-one stock split. Targa is planning somewhat smaller expansions at its Houston and Mont Belvieu terminals while Phillips 66’s new Freeport, Texas facility will have a capacity of 150,000 bpd when it comes online in the third quarter of 2015. 

PDHs and Other Esoterica

Because a major use of LPG is as a petrochemical feedstock, much of the additional capacity is destined for China, which has nine new PDH plants under construction and scheduled for completion by 2017. Several of these have announced plans to use LPG imports from the U.S. as feedstock, as much as six million tons a year or roughly 200,000 barrels a day. (Hint: One ton of LPG equals 12 barrels). That’s a lot of product.

What are PDH plants, you ask? Good question. PDH stands for propane dehydrogenation, a process that converts LPG in the form of propane into propylene, from which high-quality plastics are derived. Naphtha, derived from oil, is the traditional raw material for propylene. But naphtha is more expensive than LPG because it is based on global oil prices, whereas the price of natural gas varies from region to region and is much cheaper in places like the U.S. and Middle East than the rest of the world. So if you’re a big user like China it makes sense to import LPG as feedstock rather than naphtha. 

The same is true for ethane, another member of the LPG family. Ethane is used to make ethylene and polyethylene, two more sources of high-end plastics, resins, adhesives and synthetic products used in everything from airliners and automobiles to packaging, pharmaceuticals, food, clothing, furniture and toys. Ethane is a growing U.S. export and, closer to home, Shell Oil reportedly is considering building a world-class ethane cracker in western Pennsylvania (estimated cost: $5 billion) because of its proximity to the gas-rich Utica and Marcellus shales.

According to a recent Reuters report, U.S. LPG is currently loading on the Gulf Coast for less than $600/ton compared to $760/$780 in the Middle East. Even with the higher freight rates from the U.S. (a situation that will change with the new Canal), it’s more economical for Asian producers to purchase their LPG here.

How to Play It

There are roughly 1,000 vessels in the global LPG fleet. About 160 of them are VLGCs. Rates in the spot market for VLGCs are up over 70 percent from a year ago and close to $100,000/day. Time charter rates are not far behind. They’re making money, unlike tankers or container ships. But so are the smaller-size LPG vessels, the so-called SGCs, and the mid-size Handysize carriers.

StealthGas, whose ticker symbol is GASS, has found a niche in the SGC market, billing itself as “the world largest owner and operator of pressurized LPG vessels in the strategic 3,000-8,000 cbm segment” (20,000-50,000 barrels). It has 40 of them. It is also Deutsche Bank’s top pick in the LPG universe. GASS intends to maintain its industry-leading position with 19 new vessels on order, including two 22,000 cbm Handysizes (150,000 barrels). GASS is headed by Harry Vafias, who graced the cover of this magazine back in 2009.

If you don’t like GASS you can try Wilbur Ross’s Navigator Holdings, whose ticker is the more mundane NVGS. NVGS is the biggest operator of Handysize vessels with 23 of them and four more on order. It has about 10 percent of the global trade in LPG.

Dorian LPG is another “pure play” company worth looking at, and it has a much sexier symbol than Navigator – LPG. Yep, LPG. How cool is that? LPG (the company) plays in the VLGC space with four of them currently in its fleet and another 18 on order. Eighteen? That’s a lot of new tonnage. But the company appears to have its financing in place, and Wells Fargo has an Outperform rating on the stock.

You want one more? Okay, how about Avance Gas, whose ticker is simply AVANCE, and which is traded on the Oslo exchange? Dig out your krones! Avance, which was started by Stolt-Nielsen seven years ago with one vessel and now boasts Stolt, Sungas and Frontline among its major holders, currently operates a fleet of six VLGCs and has another eight on order with deliveries beginning later this year. It’s no secret that Avance has its eye on Dorian, so be on the lookout for fireworks ahead. Happy hunting!