NGL Price Update: Butane and Isobutane

By Published On: September 20, 2013

In the last Graph of the Week, we examined recent trends in US production and prices of natural gas liquids (NGL), with a particular focus on ethane and propane. Although these two NGLs last year accounted for 71 percent of field production, investors shouldn’t overlook the importance of the heavier end of the barrel–butane, isobutane and natural gasoline–to upstream operators and gathering and processing outfits’ profit margins. As of Sept. 18, 2013, normal butane and isobutane contributed 23 percent of a mixed barrel of NGLs’ value, while natural gasoline accounted for 30 percent.

Source: Bloomberg, Energy Information Administration, Energy & Income Advisor

This installment will focus on the supply and demand outlook for butane and isobutane; next week we’ll delve into the dynamics shaping the US market for natural gasoline.

Why should investors care about trends in these esoteric markets? Price weakness in the heavy end of the NGL barrel–particularly butane and isobutane–emerged as a headwind for some producers and gas processers in the second quarter. Fortunately, the recent resurgence in the price of propane has helped to offset this weakness in the third quarter.

Source: Bloomberg, Energy & Income Advisor

A lack of liquidity in the market to hedge NGLs means that names with outsized exposure to these the price of these hydrocarbons have no other recourse than to take the pain.

Accounting questions aside, the precipitous drop in NGL prices has depressed Linn Energy LLC’s (NSDQ: LINE) distributable cash flow over the past year. Meanwhile, Williams Partners LP’s (NYSE: WPZ) gathering and processing business entails significant exposure to NGL prices because of the master limited partnership’s (MLP) commodity-sensitive contracts. The drop-down of Williams Companies’ (NYSE: WMB) olefin production plant in Geismar, La., which benefits from weak ethane and propane prices, aimed to offset this headwind; however, an explosion at the facility earlier this year has ensured that the Williams Partners’ distributable cash flow remains under pressure.


Driven by the shale oil and gas revolution, the volume of normal butane and butylene produced by US field processing plants has surged by 32 percent over the past three years. This momentum has continued into 2013, with first-half output climbing by 11 percent on a year-over-year basis.

Source: Energy Information Administration, Energy & Income Advisor

As of yet, growth in US butane production has yet to be matched by a meaningful uptick in domestic consumption. The dramatic decrease in US ethane prices over the past few years has reduced demand for butane as a petrochemical feedstock. Favorable economics have prompted US refiners and blenders to increase their use of normal butane as an additive in motor gasoline by about 6.2 percent over the past few years; however, flat to declining domestic gasoline demand and only modest growth in refinery capacity should cap demand growth related to this application. At the same time, a shift away from processing Maya crude oil in favor of light-sweet varietals or Western Canada Select would lead to a slight increase in the butane volumes produced by refineries.

This combination of rising production, elevated inventories and insufficient demand growth started to weigh on the spot price of normal butane in summer 2012. These same headwinds conspired to send the price of this NGL to a three-year low in June 2013.

Source: Bloomberg, Energy & Income Advisor

As you can see from this price graph, North America’s growing production of normal butane tends to magnify the seasonal weakness that occurs each summer. Under the auspices of the Clean Air Act, the US Environmental Protection Agency limits the volume of butane that refiners can blend into motor gasoline. Not only do these rules reduce emissions during the summer driving season, but they also make sense in terms of maximizing engine performance. In the summer, gasoline that has too much butane can lead to vapor lock; in the winter, these additional vapors facilitate engine turnover.

Two developments suggest that butane prices should strengthen through year-end and into early 2014. For one, we’ve entered the time of the year when demand tends to pick up, which should bring some relief. At the same time, seaborne butane exports have also grown in recent years and in 2012 hit their highest level since 1983. This incremental increase in part reflects Enterprise Products Partners LP (NYSE: EPD) and Targa Resources Partners LP’s (NSDQ: NGLS) new export facilities on the Gulf Coast.

Source: Energy Information Administration

With North American butane production expected to ramp up significantly as new fractionation capacity (facilities that separate NGLs into purity products), export capacity will provide an important release valve for the domestic market. The table below highlights a number of proposed export projects.

Source: Bloomberg, Company Reports, Energy & Income Advisor

Although we expect rising exports of normal butane to help balance the US market in coming years, the timing of new capacity additions suggest that the price of this hydrocarbon will remain volatile in the near term. Moreover, the expense associated with liquefying and transporting butane volumes to international customers will also ensure that North American prices remain below world levels.

Rising US exports of motor gasoline represent another promising release valve for the domestic market; as midstream operators such as Oiltanking Partners LP (NYSE: OILT) seek to address the shortage of dock space and storage tanks, shipments of US motor gasoline should start to displace volumes that Latin American nations formerly imported from European refineries.


Like propane and butane, isobutane is produced by processing and fractionating field NGLs and as a byproduct of refinery cracking and distillation processes. However, isobutane is unique in that refineries and some fractionators also convert butane into isobutane via a process called isomerization.

Domestic production of isobutane and isobutylene from field gas plants and non-refinery, merchant isomerization operations has increased significantly since 2010 and hit a 30-year high in 2012. This momentum has continued into 2013, with first-half output up 10.5 percent from year-ago levels.

Source: Energy Information Administration, Energy & Income Advisor

Although isobutane has applications as an aerosol propellant and a refrigerant, the vast majority of US production is used to produce alkylate, a high-octane fuel additive that generally commands a premium to gasoline and accounts for 11 percent to 13 percent of the blending pool. The process of alkylation combines olefins such as propylene, butylenes and amylene with isobutane in the presence of an acid catalyst. 

Unlike ethane and other NGL markets, isobutane traditionally enjoys a self-correcting mechanism whereby merchant isomerization units react to an oversupply by curtailing output. But the upsurge in field production of isobutane could reduce demand for isomerization, bolstering domestic supply of normal butane.

To take advantage of weak butane and isobutane prices, independent refiner Valero Energy Corp (NYSE: VLO) announced plans to construct an alkylation unit at its Houston refinery with a nameplate capacity of 12.5 million barrels per day. Management estimates the internal rate of return on this project, which would come onstream in 2017, at 30 percent.

Valero Energy and other companies investigating these projects are betting that inexpensive butane and isobutane will enable them to sell their motor gasoline to customers in Latin America and West Africa at a lower price than European refiners, winning market share and bolstering margins. An increase in Gulf Coast alkylation capacity would go a long way toward balancing the domestic isobutane market; we will watch closely to see if other US refiners follow Valero Energy’s lead.


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