Apr-2013

Alkylation: an option to monetise 
the increasing North American surplus of butanes

The recent success and rapid growth of fracking in shale and tight rock formations has not only resulted in a surge of North American natural gas and light oil production, but also rapid growth in natural gas liquids (NGL) production.

Eric Ye, DuPont Sustainable Solutions
Daniel Lippe, Petral Consulting

Article Summary

While it is anticipated that the lighter components contained in this NGL, such as ethane and propane, will find ready markets in the production of light olefins or export markets, the growing supply of normal butane production from natural gas processing faces a particular challenge.

Much of the butane produced from natural gas and refining operations is ultimately used for motor gasoline production. While chemical and other industrial uses, such as refrigerants and propellants, exist, these applications are limited or niche in nature. As the light olefin industry focuses on the use of light NGLs, such as ethane and propane, as increasingly cost advantaged feedstocks, the market for butane as an ethylene cracker feed will shift to minimal levels, reducing the domestic market for butanes yet further. The reality is that the disposition of these compounds will depend on a refiner’s ability to blend these materials in the gasoline pool or to place them in export markets.

However, with declining gasoline consumption in North America—a result of increasing vehicle fuel efficiency standards and changing demographics—the ability to directly blend butane into the gasoline pool is also projected to decrease. Potentially more stringent EPA vapour pressure, sulphur, and octane requirements may reduce the ability to directly blend butane into the gasoline pool further.

This growing surplus of butanes is already having an impact on butane pricing, which is increasingly selling at a discount to heavier products. While export markets can solve the overall physical issue of containment, market pricing must be discounted with respect to export markets to account for seasonal inventory constraints, in addition to the shipping and handling charges associated with exporting pressurised and refrigerated products. This trend is clearly evident in North American butane market pricing, which in the past two years has sold at an increasingly wide discount to gasoline.

While refiners have and likely will continue to have adequate measures in place to contain their butane inventories with only moderate impact on their overall operations, the wide butane discount to gasoline has created an opportunity for refiners, like their petrochemical counterparts, to leverage these highly discounted butanes to improve overall refinery profitability through the use of alkylation.

While the economic incentive to alkylate these butanes will vary depending on a refiner’s particular configuration and market, it is clear that refiners need to consider these sources of highly discounted butanes as an additional cost advantaged feedstock in future operations. Whether or not alkylation is the most appropriate means of monetising this supply of butanes can easily be ascertained with reasonable accuracy based on a number of basic calculations outlined in the Appendix (boxed text).

North American Butane Outlook
The unprecedented discount between North American natural gas prices and oil prices has resulted in North American oil and gas producers increasingly focusing on liquids-rich plays to improve returns on investment. In a seemingly self-defeating exercise, as producers focus on liquid-rich or “wet” plays, the associated natural gas production only adds to the existing surplus of natural gas, which in turn continues to depress natural gas prices. While most analysts believe that current natural gas prices of $2.00/MMBTU to $3.50/MMBTU are unsustainable and expect natural gas prices to rise, most analysts also project that prices will level out at $3.50/MMBTU to $4/MMBTU ($20/bbl to $25/bbl crude oil equivalent) while crude will continue to trade in the $100/bbl region.

It should be no surprise then that NGL production, even by the most conservative of projections, is expected to continue to rise at unprecedented rates.

Butanes and natural gasoline volumes produced from associated production efforts, while comprising a small fraction of the overall expected increase in NGL production, will have a profound impact on butane and natural gasoline supply and demand balances. This profound impact will simply be due to the sheer volume of the NGL production increase and the relatively limited market for these products.

Figure 1 highlights the projected increase in North American NGL supply. While much of the increase in NGL is comprised of ethane and propane, Figure 2 highlights the increase in heavier NGL, butane and natural gasoline. As shown, the production of butanes and natural gasoline are expected to increase in the next three years by 50,000 bpd for butane and 23,000 bpd for natural gasoline(1).
 
Butanes - a Problem or an Opportunity?
With the increasing production of bitumen in the Canadian Oil Sands, there is an increasing need for diluent to help move this heavy bitumen product to markets in the U.S. As such, the increase in natural gasoline production from natural gas wells fills this need nicely.

The butane market, however, presents a particular challenge. While the use of butane as a diluent is currently being utilised, the high vapour pressure of the compound will likely restrict widespread use of this material as a diluent.

The primary market for butanes is as a motor gasoline blendstock, either as a direct blendstock or as feedstock in the production of a heavier molecular weight gasoline blendstock. Although butanes and butenes have high octanes, depending on the season, their relatively high blending reid vapour pressures (RVP) restrict the amount that can be blended into gasoline. This limit is especially restrictive during the summer months. During the summer driving season (the time for highest seasonal gasoline demand), the amount of butanes that can be blended into gasoline is especially restricted to avoid volatile organic compound (VOC) emissions which are precursors to smog formation. During this time period, a refiner’s ability to blend butanes or butenes into gasoline is virtually eliminated. Unless these compounds are converted to a heavier lower RVP blendstock or to petrochemicals, a refiner must make arrangements to store and thus contain these materials until direct blending can be utilised or the material can be sold to a third party.