IEEJ: August 2013 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (141)

August 16, 2013

LPG Market under Shale Revolution (2)Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Under the progressing shale revolution, U.S. LPG production has increased substantially,
indicating that the United States could greatly expand LPG exports and become the world's largest
LPG exporter, eclipsing Qatar and Saudi Arabia, as explained in the previous report titled ”LPG
Market under Shale Revolution (1)”." The predicted change may exert great impacts on pricing andprice trends in the international LPG market.
The Middle East commands the largest share of global LPG exports, accounting for about
35 million tons or more than 50% of about 63 million tons in global LPG exports in 2011. Thelargest LPG importer was Asia, importing about 35 million tons, equivalent to the Middle East'sexports. The Contract Price (CP) mechanism is a pricing approach that links the Middle East as thelargest LPG exporter and Asia as the largest importer by working to price Middle Eastern LPG forthe Asian market.
The Contract Price or CP is notified by Saudi Aramco, a state-run oil company in Saudi
Arabia, to its trading partners based on crude oil price and spot LPG price trends. Saudi Arabia,
though having been replaced by Qatar as the largest LPG exporter in the world, is still a large LPG
exporter exerting great influences on LPG pricing. Since other Middle Eastern LPG exporters follow
the CP, the CP mechanism is the most important pricing approach for international LPG trade,particularly LPG trade in Asia including Japan.
The CP mechanism has retained the most dominant influence on LPG pricing since its
introduction in 1994. As mentioned above, the mechanism takes crude oil price and LPG bid pricetrends into account. Nevertheless, it fails to directly reflect the supply-demand balance in the LPG
market and represents a price notified by a major LPG exporter. Therefore, Asian LPG buyers haveoccasionally called for a pricing mechanism to better and more precisely reflect the supply-demandenvironment for the LPG market. But the CP mechanism's position has remained unshaken.
Under such circumstance, a new move is emerging from the possibility of the U.S. LPG
export expansion. This is because reference LPG prices in the United States are set at Mont Belvieu(MB) in Texas based on the LPG supply-demand balance, just as reference U.S. natural gas prices
are determined at the Henry Hub based on the natural gas supply-demand balances. MB represents a1

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market reflecting the supply and demand environment for LPG as a commodity and amounts to theHenry Hub for natural gas.
MB prices have dropped substantially particularly since the second half of 2011 due torapid LPG supply and demand environment changes where the substantial output expansion andoversupply have prompted many LPG export projects to be considered. MB LPG prices haverecently been around $400-500 per ton against around $800 per ton in mid-2011. Meanwhile, CPprices have remained around $900 per ton amid a crude oil spike, widening their gap with MB prices.
In a similar development in the natural gas/LNG market, Henry Hub natural gas prices have dropped
under the shale revolution and widened the gap with Asian LNG prices that are linked with crude oil
prices and which have risen sharply.
In this respect, it is important that expanding LPG output and robust LPG export projects
under planning are expected to lead the United States to become the world's largest LPG exporter,
surpassing Qatar and Saudi Arabia. The actual market conditions and market players' speculations
about future conditions have already begun to exert impacts on pricing and price trends in theinternational LPG market.
Given the present MB prices at $400-500 per ton and a U.S.-Asia transportation cost of$200 per ton, Asian buyers can be expected to procure U.S. LPG at $600-700 per ton based on MBpricing, far below present CP levels. The estimated U.S. LPG procurement cost is sufficiently
attractive for Asian buyers striving to reduce costs. Therefore, Japanese and other Asian LPG market
players have paid attention to the LPG market developments and launched efforts to procure LPG
from the United States.
Such moves of Asian LPG buyers have naturally become a great matter of concern toLPG-exporting Middle Eastern countries, indicating that strategic considerations could be given toCP levels and the CP mechanism. The U.S. LPG output expansion under the shale revolution has
become a leverage to shake the traditional LPG market through various mechanisms. As is the casewith natural gas and LNG, simple estimates like those given above may not necessarily beappropriate because future crude oil price, CP and MB trends for predicting the future LPG market
are uncertain. Nevertheless, LPG stakeholders have already begun to take specific strategies andactions while watching the market changes.
While U.S. LNG exports' implications for Asian LNG price and pricing trends havebecome a high-profile topic, LPG market changes have been dealt with less remarkably. Given thatthese changes are important ones involving supply and demand and prices for LPG as an energy
familiar in people’s daily lives, that the LPG market is moving in a manner to predict future natural
gas and LNG market changes, and that LPG market developments can be expected to become an
important harbinger of the shale revolution's various implications, however, I would like to pay great
attention to LPG market developments.
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