Alexandra Barysheva^a, Jevgenij Egle^a, Alexander Markov^a, Sergejs Solovjovs^a

^aEconophysica Ltd., Annecy Court, Ferry Works, Summer Road, Thames Ditton, Surrey KT7 0QJ, United Kingdom 

Abstract

In view of the worldwide shift towards cleaner and sustainable energies to reduce greenhouse gas emissions as a major cause of global warming, this paper provides an overview of the history and use of liquefied petroleum gas (LPG or LP gas), its market, and several LPG pricing models. As a fossil product, LPG is set to be a «bridging fuel» alongside natural gas in the long-term transition to a truly sustainable global energy system.

1. Introduction

The growing world economy increases the need for energy. More precisely, in all major regions, overall energy demand has tended to grow in parallel with the gross domestic product (GDP), though typically at a lower rate — especially in the most advanced economies, where saturation effects curb income-driven increases in demand [17, p. 10]. In particular, Figure 1 shows energy demand and GDP in some selected countries, where GDP is expressed in the year 2013 US dollars in purchasing power parity (PPP) terms. 

As stated in [9, p. 39], over the years 1990–2012, world primary energy demand increased by 0.6% each year on average for every percentage point of the GDP growth expressed in PPP terms. Such an increasing need for energy, though leads to various problems such as greenhouse gas emissions and climate change (global warming) since most of the used energies are not clean and sustainable. To illustrate, Figure 2 shows the use of energy sources by type during the last two hundred years.

As can be seen from Figure 2, there were three energy transitions in the considered period: from wood and other biomass to coal and then oil. The use of LPG from oil refining and increasingly from natural gas processing as a separate fuel gradually became more widespread reaching about 1.5% of global energy use by the beginning of the 1970s and 2% by 2015 (equal to roughly 6% of total oil use) [17, p. 9].

The way we currently produce and use energy, however, is unsustainable in the long term for at least two reasons. First, the bulk of the energy that we use today comes from finite and not-renewable fossil-energy sources. Thus, there is a need for sustainable in the long term energy sources. Second, the use of fossil energy creates enormous greenhouse gas emissions, which, in turn, is the major cause of climate change, that is, global warming. Thus, there is a need for clean energies that do not influence our planet significantly.

The term LPG refers to the gaseous liquids that are recovered from the processing of natural gas and the refining of crude oil. This LPG consists of two commercial products: propane and butane — both of which are gaseous at ambient temperature and pressure, and are liquid when stored and transported under pressure or in a refrigerated state [14, p. 3]. The gas mixtures may have different contents (sometimes can comprise as much as 10% olefins; in the USA, LPG is 100% propane, while some markets, particularly in Asia, offer 100% propane and 100% butane [18, p. 9]), but they are still called LPG even though they have varying characteristics [8, p. 3], as shown in Figure 3, for example. A little less than 50% of the world's LPG is produced from crude oil, and the rest is produced from natural gas [8, p. 4].

Being thus a fossil product, LPG is set to play an increasingly important role as a «bridging fuel» alongside natural gas in a long-term transition to a truly sustainable global energy system. The world will have to use LPG and other fossil sources of energy to bridge the several decades that will be necessary for competitively-priced low-carbon alternatives to be developed and commercialised on a large scale around the world. The pace of the transition will also be constrained by generally a slow rate of turnover of energy-related capital stock: both the equipment that uses energy and is involved in supplying it and by the sheer scale of investment needed in new infrastructure. Moreover, providing modern energy to the billions of people in poor countries who are still forced to rely on dirty and inefficient traditional fuels and kerosene remains a major challenge. Expanding household use of LPG — clean, efficient and practical fuel for cooking and heating — can make a big contribution to eradicating energy poverty, bringing health, developmental, and environmental benefits in those countries [17, p. 5] (see also [13] for a comprehensive review of the LPG role in reducing energy poverty in developing countries). Additionally, LPG used as a transport fuel (autogas) to replace gasoline or diesel in both light and heavy-duty vehicles can make an important contribution to improving air quality in towns and cities [17, p. 19]. Figure 4 shows the most important LPG consumption ways. We also notice that the LPG consumption has been growing steadily in recent years and at a faster rate than that of oil generally [17, p. 12].

Motivated by the growing share of LPG in the world energy supply, this paper provides an outlook on the history and use of LPG and then gives an overview of LPG markets and two LPG pricing methods.

2.     Brief history of LPG

For the convenience of the reader, this section provides an overview of the history of LPG, which goes back for more than a hundred years, following its convenient exposition of [14]. The term LPG stands for the gaseous liquids obtained from the processing of natural gas and the refining of crude oil. About 2–4% (resp. 3%) of the crude oil (resp. the raw natural gas) is separated as LPG [8, p. 4]. LPG consists of two commercial products: propane and butane, both of which are gaseous at ambient temperature and pressure, but turn liquid when stored and transported under pressure or in a refrigerated state.

2.1.     LPG early beginnings in the USA

As stated in [14, p. 6], the history of LPG goes back to the Appalachian oil fields of western Pennsylvania in the USA, some 50 years after oil had first been discovered and produced there. Together with oil came gas, and around the 1900s, markets for gas developed. Before the gas could go into pipelines though, the contained liquids had to be removed. The raw liquids that were obtained by compressing the wet gas — a mixture of propane, butane, and pentane and heavier material — were called casinghead gasoline. Their light distillate characteristics made them an early transportation fuel. However, casinghead gasoline contained a considerable quantity of highly volatile light ends, and thus, the product could not be used or shipped at once. Instead, it was left in open tanks for weathering until the so-called «wild» light ends evaporated. The industry at that time had no accurate measuring system for determining vapor pressure. Thus, there were numerous accidents and explosions that occurred from storing and transporting this unstable fuel.

In 1910, Andrew Kerr, a worker at a casinghead gasoline plant in nearby West Virginia, managed to collect and compress these gases storing the resulting LPG in small tanks.

At about the same time, Walter Snelling, employed as a chemist at the Bureau of Mines in Pittsburgh, was contacted to investigate the vapors coming from a gasoline vent tank of a Model T Ford. Using coils from an old water heater and other laboratory equipment at hand, he built a distillation apparatus that could separate the gasoline into its liquid and gaseous components. He then developed a pressurized containment system for these liquid gases and made the first domestic installation at the farmhouse of John Dahring in Waterford, Pennsylvania. The LPG was used for cooking and lighting.

The commercialization of LPG, however, came slower. Propane was first used as a fuel in a blowtorch for cutting of metal. Nationwide, sales were only 220 000 gallons (400 tons) in 1922. It was not until 1927 that the Tappan Stove Company began to produce cooking ranges based on propane as fuel.

2.2.    LPG international developments

In the late 1920s and early 1930s, there emerged airship as a serious contender for international air travel. Regular long-distance services were starting on a number of routes. These airships used butane carried in cloth bags at low temperature as an engine fuel. As the butane was consumed, the bags collapsed and their volume was displaced by air. The weight, thus, remained unchanged and the airship could stay at the same level in height even on long voyages. Butane was chosen because it was cheaper than hydrogen that was used for holding up the airship. Butane tanks were, therefore, built at various refuelling stations around the world. Butane was shipped to these locations from Houston, USA in small pressure tanks on the decks of cargo liners. In the afternoon of May 6, 1937, the disastrous crash of the German passenger airship Hindenburg in New Jersey, USA (with 36 fatalities) put an end to airship dreams. They disappeared from the skies, and the butane tanks along the routes were being sold for scrap.

The one exception was in Rio de Janeiro, Brazil. An Austrian businessman, Ernesto Igel, who imported gas stoves into Brazil, saw butane potential as cooking fuel. He offered to buy the remaining 6,000 butane cylinders that were available in Rio de Janeiro. His salesmen patiently lugged stoves and steel bottles along the streets of Rio de Janeiro to promote this new cooking fuel. By 1939, his company called Ultragaz had been operating three trucks and had had 166 customers. As the use of gas stoves spread, his business grew and prospered. By 1950, he had had 70,000 customers altogether. One of his problems, though, was to source the LPG as the airship stocks ran out. He began importing cylinders from the US Gulf Coast on the decks of cargo liners. During the war years, when this trade was interrupted, he found some LPG in Argentina.

After the war, a new arrangement was found — with a supplying company Socony Vacuum (later — Mobil) in Houston, USA, and a Norwegian shipowner, Oivind Lorentzen, who operated the Nopal liner service to Brazil. Later, these parties created the first international trading company in LPG, Mundogas.

2.3.    LPG industry growth

Prior to the 1970s, LPG in terms of international trade had been mostly a regional business. Every region had its pricing structure, shipping, and also buyers and sellers.

The first regional trade, which started in the 1950s, was from the US Gulf (the coastline along with the Southern United States) to South America. The used ships were usually converted bulk carriers equipped with LPG tanks. The main destinations were Brazil and, later, Argentina, whereas the main shipper was the already mentioned Mundogas.

The Caribbean basin was also an outlet. Tropigas based in Miami expanded into an important small-ship LPG trader in this region. The company never traded more than 200,000 tons per year but still contributed a significant number of people to the international LPG industry.

In 1960, Mundogas began LPG export shipments from Venezuela, and, by the end of the decade, Venezuela had replaced the US Gulf as the regional source of exported LPG. Mexican LPG from the Cactus plants became available later, in the 1970s. By this time, the US Gulf had become a significant LPG importer. This trade remained bigger than the LPG seaborne trades in Europe. The European coastal and the Mediterranean trades never amounted to much more than half a million tons per year (making 0.3 and 0.5 million tons in the years 1970 and 1975, respectively [14, p. 149]).

The next regional trade, the long-distance shipments to Japan, needed the introduction of ships of larger fully-refrigerated design. By the 1970s, they were being built in increasing numbers, and the trade East had become the most important one in terms of volume. It started as a partnership between the oil majors, such as the Aramco partners in Saudi Arabia or BP in Kuwait and the Japanese importers. The former constructed the plants and made the LPG available, and the latter agreed to buy and built ships and terminals to move the produced LPG to Japan. The LPG export volumes were potentially so large, particularly out of the Middle East, that the Western LPG traders saw the opportunity, and, by the mid-1970s, they had begun to compete aggressively for FOB (free on board) supply contracts there. Notice that there are two important terms that often occur in LPG trading: the already mentioned FOB and also CIF (cost, insurance, and freight). If the trade is CIF, then the transportation costs to the buyer are included in the price. If the trade is FOB, then the buyer has to arrange and pay for the transport. Because of additional transportation costs, the listed CIF prices are, in general, higher than the listed FOB prices [8, p. 9].

The expansion of Middle East LPG capacity, occurring over the 1975–1985 decade, was astonishing — from 6 million tons of installed capacity in 1975 to 17 million tons by 1980, and 30 million tons by 1985. However, it was not only in the Middle East that LPG plants were being built. Australia, Indonesia, Algeria, the North Sea, and Venezuela were also new sources of supply. The 1980s turned out to be a period of tremendous LPG export expansion worldwide, as can be seen in Figure 5. The LPG market became truly global at that time. Producers needed buyers, whether from Asia, Europe, the United States, or South America. The new export volumes had to find customers somewhere. 

Shipowners anticipated the supply growth by placing orders for very large gas carriers (VLGCs) that could carry 40–45,000 tons of LPG economically on long-distance trade routes. The first vessels of this size were built in the early 1970s for dedicated Middle East to Japan trades. Sixteen ships had been in service by 1977. At the same time, no fewer than 25 new orders for these vessels were placed at yards in Japan and Europe. The optimism of the time was such that many of these vessels were ordered on speculation without any firm charter commitment in hand. Notice that the general gas fleet can be divided into VLGC with the capacity of 60–85,000 cubic meters (CBM), large gas carriers (LGS) of 50–60,000 CBM, medium gas carriers (MGC) of 18–42,000 CBM, and a small petrochemical segment of 1–23,000 CBM [7, p. 3].

2.3.1.    LPG industry in Russia

Following [14, p. 76], Russian LPG first became available to Western Europe in the mid-1960s. For some time, two Russian pressure tankers, Ķegums and Krāslava, shipped ammonia and some LPG across the Atlantic to Cuba. In 1965, Gazocean (the French company founded by Rene Boudet in 1957) was able to sign a FOB contract for 120,000 tons per year of propane out of the Baltic port of Riga. It was shipped to Petit Couronne in France under a government-to-government deal.

Russia’s huge gas reserves gave it a considerable LPG potential, particularly, in Western Siberia. The main problem, however, was logistical, i.e., how to move the product to the market. The construction of a dedicated 1,150-kilometer gas liquids pipeline across the Urals — from South Balyk in Tyumen Oblast to Minnibaevski in European Russia — appeared to solve the problem. Unfortunately, the line suffered from a devastating explosion in June 1989 near Ufa caused by the spark from a passing Transsiberian train and never operated beyond Tobolsk. Since then, LPG export from Russia depended on railcars. The state plant Azovmash in Ukraine built the first generation of Russian LPG railcars. In 2001, the number of railcars in Russia and other countries of the former Soviet Union amounted to about 25,000.

During the 1970s and 1980s, an amount of LPG came West, which was shipped out of the Baltic region from Riga in Latvia or Hamina in Finland. The direction of trade shifted in the 1990s after the fall of the Berlin wall. Former Warsaw pact countries (e.g., Poland and Hungary) opened their markets to LPG companies from the West. These companies invested in storage facilities at several transshipment stations (e.g., Brest–Malashevichi on Belarus–Polish border) to receive Russian LPG. By the year 2000, this overland trade in LPG had been close to a million tons per year.

Gas plant production of LPG contracted rather than expanded after the collapse of the Soviet Union. Sibur emerged as the main supplier and exporter. Sibur, though, ran into financial and domestic political problems in 2001, and that led to the removal of its management structure and its takeover by Gazprom.

The LPG that originated from European Russia or Western Siberia would move long distances by railcar to reach its destination. Block trains were programmed a month at a time. Unit freights were in the $60–80 per ton range at prevailing FX rates in 2001, the number depending on distance, negotiation, and also the number of border crossings. There have been few term contracts in the LPG business. LPG is mostly sold spot at the border at fixed prices. Sales are done either FCA (free carrier: the seller delivers the goods, cleared for export, at a named place possibly including the seller’s premises, but the goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer) or DAF (delivered at the frontier: the seller pays for transportation to the named place of delivery at the frontier, and the buyer arranges for customs clearance and pays for transportation from the frontier to their factory; this term can be used when the goods are transported by rail and road).

Starting in 2001, competition came from a Western consortium Tengizchevroil producing LPG in the Caspian region in Kazakhstan. This LPG makes the long rail journey through the Russian territory into Poland and other countries of Central Europe. The movements were close to 500,000 tons in 2002. Tengizchevroil term sales into Poland have undercut to some degree the Russian LPG trade there.

With a surplus of LPG — primarily propane and butane — on the Russian market, major producers have targeted the export market and the development of HGL-fed (hydrocarbon gas liquids) petrochemical capacity as outlets for their growing production. Traditionally, the main outlet for Russian LPG exports was shipments to Europe by rail. In mid-2012, Russia’s first modern LPG export terminal became operational in Taman at the Black Sea. With a design capacity of approximately 30,000 barrels per day (b/d) of pressurized cargo, the port handled, on average, nearly 14,000 b/d in 2016, all delivered by rail. In mid-2013, Sibur, Russia’s largest LPG producer, shipped its first LPG cargo out of Ust-Luga near St. Petersburg. In a first for Russia, the Sibur-operated terminal could handle both pressurized and refrigerated products, and then it underwent a capacity expansion from nearly 50,000 b/d to about 75,000 b/d. The Ust-Luga terminal, like Taman, is capable of receiving LPG by rail. Additional volumes of LPG are produced onsite at the Novatek-operated Gas Condensate Fractionation and Transshipment Complex.

In addition to direct exports, Russian companies were seeking to use domestically produced LPG in petrochemical manufacturing, which would capture more value and minimize their export tariff exposure. In December 2014, Sibur opened its propane dehydrogenation facility at the Tobolsk-Polymer complex in West Siberia, which can produce 510,000 tons per year of polymer-grade propylene from an estimated 33,000 b/d of propane feedstock. The company planned to further increase its liquids consumption at the Tobolsk site with a proposed 1.5 million ton per year ethylene cracker, expected to be fully operational by 2021 (ZapSibNefteKhim plant, which saw the construction and pre-commissioning works complete in June 2019). The feedstock for the $9.5 billion plants is expected to consist mostly of propane and butane [6, p. 16].

3.     LPG markets and pricing models

Following the brief historic LPG outlook from the previous section, we now continue with the current state of the LPG market, including two LPG pricing models.

3.1.     Main LPG consumption ways

According to [17, p. 11], LPG is a highly versatile energy source, which can be used in a wide range of applications, from water and space heating to cooking and as well as an alternative transport fuel. LPG is used in all the major energy end-use sectors: 

• Residential sector: LPG suits well for cooking and space and water heating. In some developing countries, where electricity is not available, it is also used for lighting. In developed countries, it may be well used for outdoor activities such as barbecues and camping.
• Agriculture: LPG is used to increase the production and the quality of farm products through weed flaming, crop harvesting, and crop drying. It is also used to heat breeding houses for pigs and poultry and power farm equipment such as irrigation pump engines. 
• Commercial sector: Applications include commercial cooking (restaurants and small and large-scale catering), and water and space heating in offices and other commercial premises. 
• Industry: LPG is used in a wide range of industrial processes and activities, notably where a high degree of precision and flexibility in process temperatures, as well as a strong flame, are required. Common applications include heat treatment furnaces, direct firing of ceramic kilns, glass working, textile and paper processing, and paint drying. LPG can also be used as back-up fuel for electricity generators, including hybrid renewable energy systems in remote locations. 
• Transport: LPG is increasingly used as a low-emission alternative to gasoline and diesel for taxis, buses, and private cars. 
• Petrochemicals: LPG is used as a feedstock in the petrochemical industry as an alternative to ethane, naphtha, and middle distillates in the production of ethylene, the main bulk petrochemical intermediate product used in the manufacturing of a wide range of plastics and speciality chemicals. 

Lastly, LPG is also widely used as an aerosol propellant and refrigerant.

3.2.     LPG market overview

This subsection reviews the current LPG market based on the information provided by Argus, one of the leading producers of price assessments and analysis of international energy and other commodity markets. Russian prime-minister Dmitry Medvedev signed a government resolution in February 2013 (Decree of the Government of the Russian Federation of February 26, 2013 No. 154), which formally recognised Argus as the only source of price information for setting monthly export duties for Russian crude oil, petroleum products, and LPG. The Russian government now uses Argus Urals price assessments for calculating duties for crude oil and its products and Argus DAF Brest price assessments for LPG [5].

The government resolution followed a shift to 100% Argus pricing in May 2012. Russia previously used other price assessment providers in addition to Argus. Industry requests led the Russian government to switch to Argus on an exclusive basis, and Medvedev’s decision officially recognized this practice. Finally, Argus prices are used by the key Russian ministries and government agencies, including the federal tax service, the federal anti-monopoly service, and the economy ministry [5].

Following [2, p. 1], 2018 was the year of the robust growth of the LPG market. In particular, total global production for 2018 was estimated at 317 million tons (about 3.6% higher than in 2017), while consumption was assessed at 313 million tons (about 3.8% higher than in 2017). A number of countries posted higher figures (to be expected in a higher crude price environment), but additional production from the US was the key figure, with a corresponding rise in export availability. 2018 saw the US and Chinese output continue to climb, with Russia and the Middle East remaining key sources of LPG for various export markets. In particular, Figure 6 shows the main world LPG producers in the years 2017–2018.

The global demand for LPG grew by 3.8% in 2018, making a total of 313 million tons, where the key gains were in the residential and petrochemicals sectors. The residential sector continues to dominate global demand, making a total of more than 138 million tons, up by almost 6 million tons per year compared to 2017 [2, p. 1]. Figure 7 shows LPG demand by sector in the year 2018. 

While comparing LPG consumption in the years 2013 and 2018 shown in Figure 4 and Figure 7, respectively, one can see that residential use declined by 2%, whereas the use in petrochemicals increased by 3%. Moreover, with industrial needs staying the same, the need for transport declined by 2%. Indeed, global autogas demand was stable in 2018 compared with 2017 with the total demand at just over 26 million tons. This, however, masks a trend that has emerged in recent years, in which some of the most traditional fuel markets in Asia and North-West Europe has seen a sustained decline, while a number of newcomers report strong growth [2, p. 2]. For example, Ukraine, which has experienced strong growth over the past five years, once again consumed a record volume of autogas, i.e., 1.83 million tons in 2018, up from 1.6 million tons in 2017. The country continues to benefit from the wide availability of second-hand autogas vehicles and propane, which is mostly sourced from Russia and Kazakhstan [2, pp. 2–3]. Figure 8 shows the largest autogas markets emphasizing the above-mentioned autogas use tendencies.

LPG consumption has been growing steadily in recent years and at a faster rate than that of oil, generally. This is largely due to strong growth in supply from gas-processing plants and the increased price competitiveness of the fuel. The LPG market as a whole is essentially supply-driven since production is primarily determined by oil-refinery throughput and flows to upstream gas-processing plants. The US remains by far the largest market, but demand has generally grown faster in the emerging economies, notably China and the rest of Asia [17, p. 12], which is confirmed by Figure 9.

After a fall in demand for LPG as a feedstock in 2017, 2018 figures show the continued value that the fuel brings to the non-energy sector. Total petrochemicals demand has increased by 8% during the year, with global demand in this sector making 86 million tons in 2018 [2, p. 3]. Figure 10 shows petrochemical demand for LPG by region, with Asia-Pacific being the largest source of demand.

To conclude, we notice that there is a number of studies on the LPG market in general. For example, the already cited paper [7] presented a gas shipping model (including LPG). In particular, the authors modelled shipping demand by scrutinizing production and consumption patterns that facilitated the profiling of seaborne export and import legs and the subsequent translation into ship demand. A productivity function was built reflecting the actual performance of gas ships rather than relying on theoretical speed functions.

We finish our LPG market outlook with a glance at Russia’s largest gas processing and petrochemical company Sibur, which is the major player on the Russian LPG market. We have already mentioned that Sibur emerged as the main supplier and exporter of LPG in Russia after the collapse of the Soviet Union.

3.2.1.     “Sibur” LPG industry

According to Reuters, Sibur exported 3.6 million tonnes of LPG in 2018. Moreover, Sibur LPG production reached 6.45 million tonnes in 2019, of which about a half was exported. Recently, Sibur has cut LPG exports to Europe redirecting flows to its newly built Siberian plant ZapSibNefteKhim. This Siberian plant will be one of the world’s five biggest petrochemical plants when it is fully operational (its construction and pre-commissioning works completed in June 2019) and is part of Russia’s plans to capture more value from the oil it produces. The Baltic Sea port of Ust-Luga is the Sibur main export route. Sibur announced that the company planned to reduce its LPG exports to Europe to around 2 million tonnes in 2020 as it holds back feedstock for its new plant in Siberia [10]. 

The company generally exported LPG to Europe only. However, Sibur supplied two cargoes of LPG to India in May 2020 for the first time since it looks for new markets after demand in Europe fell sharply due to the COVID-19 outbreak. According to traders, more shipments of Russian LPG to India in the coming months are currently being negotiated [12]. Additionally, Sibur plans to divert supplies of LPG to China from Belarus and Poland as the Asian country starts to recover from the COVID-19 outbreak. Sibur LPG exports to China have been irregular and small-scale in recent years [11].

Figure 11 shows the present Sibur business model, in which LPG sales generated revenue of 159 billion Russian rubles in 2019. Moreover, Figure 12 shows the main Sibur shipment routes (where ARA stands for Amsterdam, Rotterdam, and Antwerp, and SI stands for Sibur International), outlining the main benefits of the launch of its ZapSibNefteKhim plant.

3.3.     LPG pricing models

This subsection gives a brief overview of two LPG pricing methodologies. The first one is an official methodology of Argus, which is a global energy and commodity price reporting agency. The second methodology is a somewhat academic approach of a master thesis.

3.3.1.     Argus LPG pricing methodology

We will consider Argus DAF Brest price assessments for propane-butane mix and propane, which provide the standard industry reference price for LPG rail cargoes moving to Poland. Notice that as stated by Argus itself, Argus DAF Brest price assessments are the most liquid, most referenced prices for Polish rail cargoes of LPG. These price assessments are widely used in contracts for gas supply, in transfer pricing, to assess export duties in Russia and Belarus, to determine state-regulated prices for liquefied gas in the Kazakh domestic market, for risk management, and market analysis. More generally, these price assessments are extensively used by energy companies, governments, banks, regulators, and other organisations as benchmarks for derivatives and indexes in physical contracts.

General pricing methodology: The Argus pricing methodology is described in [3, 4]. Argus strives to construct methodologies that reflect the way the market trades. Argus aims to produce price assessments that are reliable and representative indicators of commodity market values and free from distortion. Thus, the specific currencies, volume units, locations, and other particulars of an assessment are determined by industry conventions. Argus uses the trading period deemed by it to be the most appropriate (in consultation with industry) to capture market liquidity. To be included in the assessment process, deals should meet the minimum volume, delivery, timing, and specification requirements in the Argus methodology [4, p. 2].

Argus price assessments are based on information received from a wide cross-section of market participants, including producers, consumers, and intermediaries. Argus reporters engage with the industry by proactively polling participants for market data. Argus contacts and accepts market data from all credible market sources, including the front and back office of market participants and brokers. Argus also receives market data from electronic trading platforms, like Argus Open Markets TM (AOMTM) and directly from the back offices of market participants. Argus accepts market data by telephone, instant messenger, email, AOMTM, or other means. If more than 50% of the market data involved in arriving at a price assessment comes from a single party, Argus engages in an analysis of the market data with the primary reporter to ensure that the quality and integrity of the assessment have not been affected [4, p. 2]. Argus encourages all sources of market data to submit all market data they have and that falls within the Argus stated methodological criteria for the relevant assessment. Throughout all markets, Argus is constantly seeking to increase the number of companies willing to provide market data [4, p. 2].

In every market, Argus uses the methodological approach deemed to be the most reliable and representative of that market. Argus utilises various types of market data in its methodologies, including transactions, bids and offers, and other market information: spread values between grades, locations, timings, and many other data. The primary data tests applied by the reporters include [4, pp. 2–3]:

• Transactions not transacted at arm’s length, including deals between related parties or affiliates.

• Transaction prices that deviate significantly from the mean of all transactions submitted for that day.

• Transaction prices that fall outside the generally observed lows and highs that operated throughout the trading day.

• Transactions that are suspected to be a leg of another transaction or in some way contingent on an unknown transaction.

• Single deal volumes that significantly exceed the typical transaction volume for that market.

• Transaction details that are identified by other market participants as being potentially anomalous for any reason and perceived by Argus to be as such.

• Transaction details that are reported by one counterparty differently than by the other counterparty.

• Any transaction details that appear to the reporter to be illogical or to stray from the norms of trading behaviour. This could include but is not limited to divergent specifications, unusual delivery location, and counterparties not typically seen.

• Transactions that involve the same counterparties, the same price, and delivery dates are checked to see that they are separate deals and not one deal duplicated in Argus records.

When insufficient, inadequate, or no transaction information exists, or when Argus concludes that a transaction-based methodology will not produce representative prices, Argus reporters will make an assessment of market value by applying intelligent judgment based on a broad array of factual market information. The assessment process employing judgment is rigorous, replicable, and uses widely accepted valuation metrics. These valuation metrics mirror the process used by physical commodity traders to internally assess value prior to entering the market with a bid or offer [4, p. 3].

Argus prices are published in several reports (for LPG prices, they are, e.g., Argus Russian LPG and Condensate report, and Argus International LPG report). Subsets of these prices appear in other Argus market reports and newsletters in various forms. The price data are available independent of the text-based report in electronic files that feed into various databases. These price data are also supplied through various third-party data integrators. The Argus website also provides access to prices. When needed, Argus publishes corrections to price assessments after the publication date [4, p. 4].

LPG pricing methodology: As stated in [4, pp. 5–6], Argus LPG price assessments reflect a consensus of informed market opinion on daily bid/ask spreads for propane, butane, various gas mixtures and liquids in each region. Argus market specialists conduct comprehensive daily surveys of key market participants to collect trade information and estimate prevailing market sentiment. Through interrogative inquiry and analysis, Argus market reporters consider a broad range of information in assessing prices. This includes information on a fixed price and formula-related physical deals, market premiums, market discounts, reported but unconfirmed trades, tender results, netbacks, bids, offers, movements of the forward curve, spreads, and supply and demand fundamentals, including, but not limited to, inventories, weather, and arbitrage between regions. Argus contacts and accepts market data from all credible market sources, including the front and back office of market participants and brokers.

Argus covers regional trade in the LPG markets of the Asia–Pacific, East-Central Europe, North-West Europe, the Mediterranean, and the US to reflect a daily consensus on the prices of the day. Published prices reflect the consensus level of market activity at the end of the trading day in each region. In the absence of market liquidity, Argus will use its knowledge and experience, combined with a market consensus, to establish a buy-sell assessment. Such a method minimises the chances of distortion or inconsistency in an approach that accompanies other methodologies. It provides greater confidence to the subscribers that the prices will be representative of the market and will not be distorted by unrepresentative factors. The price series are used extensively in third-party contracts, risk management contracts (such as swaps), internal price transfer, internal benchmarking, mark-to-market assessment, and market analysis.

Reporting on LPG markets needs a certain degree of judgment from the reporter, especially when the market is opaque. Deals are reported if they are confirmed by a reliable source, but reporters will always use their judgment before establishing the final price assessments. This approach means reporters need to have a wide range of contacts. Argus reporters have to understand the market they are reporting on. This rigorous approach guarantees precise, reliable, and relevant assessments.

The methodology is updated regularly after extensive consultation with the industry. Any changes to the specifications behind the quotations are announced in the relevant market reports. Amendments to the methodology are made, when necessary, to reflect the changes in the structure of trading and any changes in the pricing or contractual norms of each market. Price assessments are based on market surveys that are conducted over the telephone and through electronic mail exchanges. Argus uses all appropriate information sources to identify the prices prevailing on the market and does not restrict itself to one subsection of the market such as a single trading platform or any single informational channel.

The market surveys are balanced in their approach and are conducted by well-trained specialists who are part of a dedicated team responsible for the report. Information from the survey is verified as the best possible and archived in databases. The methodologies are detailed and transparent. A professional approach by trained staff monitored by experienced managers is a characteristic of the Argus tradition. All assessments and formulas refer to the price on the day of the published report. The prices are for contracts under whatever general terms and conditions are accepted as the standard prevailing in that particular market.

LPG price specification: The following are the two DAF Brest price assessments as of [4, p. 6]. 

DAF Brest propane-butane mix:

Unit: US dollars/tonne
Volume: railcars, 100–1,000t
Basis: DAF Brest (Belarus-Polish border). Trade at the border crossings listed below will also be considered for inclusion in the assessment:

• Brest–Malashevichi

• Mamonovo–Branevo

• Zheleznodorozhny–Skandava

• Svisloch–Semyanuvka

• Bruzgi–Kuznitsa

• Izov–Hrubeshuv

• Yagodin–Dorohusk

Timing: railcars lifting 2–30 days forward 

Timestamp: 5.30pm Moscow time, daily

DAF Brest propane:

Unit: US dollars/tonne
Volume: railcars, 100–1,000t
Basis: DAF Brest (Belarus–Polish border)
Timing: railcars lifting 2–30 days forward Timestamp: 5.30pm Moscow time daily

Table 1 provides propane specification.

Argus does not include off-specification or «formula» transactions in its assessment. We also notice that DAF Brest price assessments are used in Argus Polish Domestic Index (APDI^TM) price:

Basis: FCA Plock

Specification: the product contains on average 50% propane and 50% butane,

where the APDI price is an assessment for the domestic Polish market calculated on deliveries to Poland from the ARA region (Amsterdam, Rotterdam, and Antwerp) through sea terminals and by rail from the eastern and former Soviet Union regions [3, p. 9]. The calculation is as follows (notice that logistics and freight costs are revised on an annual basis; also notice that Orlen Gaz is a part of PKN Orlen Group, which is a major Polish state-owned oil refiner and petrol retailer with major operations in several European countries as well as Canada, with Orlen Gas itself being the largest company operating on the Polish LP gas market with over fifteen years of experience, specialising in selling and distributing propane, butane, and propane-butane mixture products of the highest quality):

APDI = [(ADBM · 65% + ADBP · 10% + (CAL + F) · 5%) + (LOG/$)] + 20% · OG/$, (APDI)

where:

•   ADBM = average Argus DAF Brest for mix;

•   ADBP = average Argus DAF Brest for Propane;

•   CAL = average CIF ARA for Propane;

•   F = sea freight from ARA to Stettin (is taken for 2016 as $60/mt);

•   LOG = total average logistics costs from DAF and to Plock (is taken for 2016 as 190 PLN/t);

•   $ = exchange rate PLN/USD;

•   OG = Orlen Gaz quotation (with 0 logistics cost).

LPG price assessment example: Figure 13 shows an example of the LPG price assessment from one of the (freely available on the Internet) reports offered by Argus and dated back to January 31, 2018 (notice that FSU stands for the former Soviet Union) [1].

It is stated in [1, p. 3] that «The DAF Brest assessment for LPG mix slipped as trading activity was low. Only two companies showed interest in buying 700t of LPG mix at $435-438/t. A seller offered a 500t cargo at $446/t and, by the end of the trading session, decreased the price several times to $440/t, but the cargo remained unsold. No activity was seen on the propane market as mild weather persists in Poland.»

3.3.2.     Pricing of LPG in North-West Europe

This subsection considers an approach to LPG pricing in North-West Europe studied in [8]. More precisely, the author develops a model for forecasting future propane prices in North-West Europe both on daily and monthly horizons. Unlike the business-oriented approach of Argus, the present technique is somewhat academic, i.e., concentrates not on the final price, but rather on the factors driving it. For example, this approach tries to predict whether the future price of LPG will go up or down.

As stated in [8, p. 1], one of the problems with the LPG trading makes the absence of a «true» marketplace, where trades are done. Instead, all trading agreements, both the physical and the financial contracts, are made over the counter (OTC), most often, using a broker. This makes the trading of LPG different from crude oil and natural gas trading, where an organized market exists. In the absence of an exchange market, several pricing institutes (Argus, Platts, Icis, etc.) present market prices of LPG in different regions based on some formula and interviews with the companies and brokers trading LPG. These listed prices indicate the current price level but do not provide a guaranteed price for trading. To complicate matters further, the listed price often varies among different institutes. The bid-ask spread is usually big in the listed prices and on trading days when no physical trading takes place, the strange price jumps with no obvious logical explanation are common. In addition, the LPG price is very volatile, with no typical patterns, which makes it hard to predict future prices. Thus, the price indicators given by the pricing institutes are different among the institutes and uncertain. The high values involved in the LPG trading generate good trading opportunities for players that can predict future price movements. Therefore, it is important for a company to know what affects the price and how to take advantage of this knowledge in its trading strategies.

The European market is divided into three parts: North-West Europe (NWE), Mediterranean, and Eastern Europe. Most of the LPG in the NWE and Mediterranean market comes from oil and gas fields in the North Sea. The rest is imported from the Middle East, Africa, and Eastern Europe. The NWE market has its largest trading hubs in the ARA region (Amsterdam, Rotterdam, and Antwerp) and is sometimes called the ARA region. The NWE region includes Belgium, Denmark, Germany, Ireland, Netherlands, Norway, Sweden, the UK, and the northern parts of France. The region consumes about 11 million tons of LPG per year, which is a small part of the global market [8, p. 8].

According to [8, p. 10], there exist a number of factors driving LPG prices:

• Crude oil: LPG price is related to the crude oil price.

• Natural gas: LPG price is related to natural gas prices.

• Naphtha: Naphtha, just like LPG, is one of the light distillates in the crude oil refining process. The main use of naphtha is as a high octane component in gasoline and as feedstock for cracking in the petrochemical industry. Many crackers can alter their use of feedstock and choose the most cost-efficient according to the demand for petrochemical products. Since the petrochemical industry is a large consumer of LPG, the demand from this sector may affect the LPG price.

• Seasonal variation: LPG price is often lower during the spring and summer than during the winter. Another possible reason for seasonal variation makes industrial and economical cycles. In good market conditions, demand from industry is high and companies are more willing to pay a higher price for feedstocks, such as LPG. In a bad economic environment, demand is typically low, and companies are not willing to take the risk of purchasing LPG in large quantities.

• East-West spread: The spread is defined as the difference in LPG prices between the western region, like NWE or Mediterranean, and the eastern region, like Japan or China. Arbitrage opportunities will arise if the spread becomes too large. The arbitrage opportunity is to buy LPG in a region at a low price (western region) and sell in a region with a high price (eastern region). When the spread is larger than the shipping cost between the regions, an arbitrage opportunity exists. To utilise an arbitrage opportunity, low transport costs are necessary, which requires large trading volumes.

• Other factors: These factors include changes in supply and demand, psychology (beliefs about the future), and shipping availability (e.g., availability of gas tankers).

To evaluate the driving factor hypotheses and to find a suitable model for the propane price in NWE, different types of data have been collected. The data contained price series of propane, butane, naphtha, natural gas, Brent crude oil (Brent, together with West Texas Intermediate crude, are the most well-known crude oils and are very important for the global oil prices), and Euro Stoxx 50 index. In addition, temperature data for NWE and swap/forward prices of propane, naphtha, and Brent have been collected. The data consisted of daily (all available trading days) observations in the period starting on January 4, 1999, until February 28, 2014. Some series had up to 30 missing data points in that period, which were then replaced by the average of previous and following observations. If more than three series had missing data for a specific date, then this date was removed from the series. This gave a total of 3803 daily observations or 182 months averages available for the analysis [8, p. 29].

Based on the available data, [8] made the following conclusions:

• There is a connection between Brent and propane price returns.

• There is a connection between natural gas and propane price returns for monthly average data.

• There is a connection between naphtha and propane price returns.

• There is no connection between temperature changes and propane price returns.

• There is a connection between market and industrial conditions and propane price returns for monthly average data.

• There is a connection between East-West spread and propane price returns for daily data.

Based on the above conclusions, [8] constructed a number of models for forecasting propane price volatility, as well as daily and monthly propane prices (employing, e.g., ARMA (AutoRegressive Moving Average) and GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models). It was shown that there are two factors, Brent and naphtha, that are related to the propane price (it appeared that naphtha has more influence on propane price than Brent has, which is probably due to the petrochemical industry, a large consumer of both naphtha and propane in NWE). The performance of the obtained models, though, was rather moderate. The models for monthly propane prices, however, performed better than those for daily prices. In particular, one of the models could forecast the direction of the propane price movements one and two months forward with an accuracy of over 70% and 65%, respectively. To improve the models, [8] proposes to include supply and demand of propane in the model development. It is also suggested to re-estimate the models at every time step (the current models are assumed to be constant over time).

4.     Conclusion

Motivated by the transition towards cleaner and sustainable energy sources, in which LPG could serve as a «bridging fuel» between «dirty» and «clean» energies, this paper provided a brief outlook into the history and the use of LPG considered the current state of its market and showed two LPG pricing models (a business-oriented and academic ones). However, in [19, 20], the World LPG Association (WLPGA) suggests a passage from conventional LPG to bioLPG, which is a chemically indistinct, yet renewable form of conventional LPG. BioLPG is increasingly coming to market across Europe as a direct renewable replacement for LPG in growing volumes (for example, in March 2018, Neste biofuel plant in Rotterdam produced its first supply of bioLPG, and it is expected that the plant will produce 160,000 tonnes of bioLPG over the next four years [15]; moreover, according to [18, p. 20], Neste is the largest producer of bioLPG), with several of the largest companies having defined 100% renewable targets [20, p. 7]. In the conclusion of this paper, we briefly describe the main benefits of switching to bioLPG and its characteristics.

4.1.     Features and benefits of bioLPG

In this short subsection, we briefly outline the main features and benefits of bioLPG following its convenient description by WLPGA in [19]. Briefly speaking, bioLPG can be characterized as clean, decentralised, and efficient energy, just like LPG, but renewable. Since climate change is happening, some action is necessary. The LPG supply chain has a role to play in delivering cost-effective decarbonisation: initially, as an immediate like-for-like alternative to high carbon fuels such as coal and heating oil, and in the long term, as an agent for deep decarbonisation through bioLPG.

BioLPG is chemically identical to conventional LPG. It can replace conventional LPG, but the two can also be blended and used by existing appliances suitable for use with LPG, without the need to change or upgrade equipment or appliances. The mission behind the development of bioLPG is to further reduce carbon emissions and the environmental impact of LPG, which already emits 35% less CO2 than coal and 12% less than oil. BioLPG fulfils this mission: it emits 73% less CO2 than conventional LPG.

BioLPG is not an innovation for the distant future, it is already available on the European market in quantities that can service the energy needs of thousands of families and businesses. At the moment, production is being increased and the market has upscaled. Moreover, just like LPG, bioLPG can be used in many different sectors, such as domestic, commercial, industrial, agricultural, and also for transportation, i.e., wherever heat, light, or power is required.

BioLPG is created from renewable and waste materials. These feedstocks undergo a series of sophisticated treatments to purify their energy content. Figure 14 shows sources and feedstocks for bioLPG production.

First-generation crop-based feedstocks play an important role in the initial roll-out and uptake of bioLPG, and will gradually be phased out and replaced by waste and residue materials. To increase the availability of such advanced materials, the LPG industry and its partners need the necessary time, tools, and technology to innovate and to make this crucial energy transition happen towards 2050. The following are the main ways of production of bioLPG:

• Bio-refining: Conversion of biomass to produce fuel, heat, power, and chemicals. A large number of traditional oil refineries in the European Union have refinery technology suitable for HVO (renewable diesel, the abbreviation itself coming from Hydrotreated Vegetable Oil or Hydrogenated Vegetable Oil) conversion. In total, the global installed capacity of HVO-biodiesel is expected to increase from 4.7 million tonnes (MT) today to up to 20MT in 2025.

• Power to gas (P2G): A technology that converts electrical power to gas fuel. Combining the electricity and gas system, known as sector coupling, can increase the efficiency and flexibility of the energy system and ultimately lower the cost of decarbonisation.

• Anaerobic digestion (AD): The breakdown of organic material by micro-organisms, in the absence of oxygen. This process produces biogas (such as bioLPG). AD is a key process for developing a circular economy as it eliminates waste and regenerates natural systems.

• Gasification and pyrolysis: A process that uses heat, pressure, and steam to convert biomass materials such as forest and agriculture waste into gaseous components that can be used in various applications. Gasification is another solution that compliments and supports the circular economy.

Moreover, bioLPG can be easily and cost-effectively stored and transported, making it a flexible fuel suitable for a wide range of applications. It can be used in existing gas technologies and stored compactly in storage vessels, which saves space and expense.

In the past several years, bioLPG production volumes have grown some 50% to around 200 thousand tonnes annually, and sales of branded bioLPG have begun in Europe and the USA. Although this is less than 1% of the market for fossil LPG, it is a solid start [18, p. 7]. 

However, bioLPG faces two big challenges. The first is that government policy on biofuels, particularly European, has been inconsistent. Only a decade ago, some governments offered direct subsidies and rebates to biofuels. This proved too costly, so they moved to mandates, i.e., requiring a certain share of the market to consist of biofuels. As many of the industry’s numerous failed projects and bankruptcies suggest, economics and profits have been highly uncertain. The latest uncertainty is the EU government policy on vegetable oils.

Controversies of «food vs fuel», indirect land-use change, and destruction of natural habitat are driving possible restrictions or bans, particularly, on the palm, but on other vegetable oils as well. Since these are the main feedstocks of the present bioLPG industry, restricting them could kill the industry at its start [18, p. 7].

Longer-term, there is a much bigger challenge: even if the maximum amount of bioLPG within bio-oil (available for biofuels) was produced, this would displace total LPG production by less than 2%. For individual LPG producers and distributors, this is an opportunity, but the industry as a whole would earn a black mark from many governments. The European Union, for example, is targeting an 80% reduction in carbon emissions by 2050: 2% bioLPG does not come close [18, p. 7].

     References

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