GAIL intends to import ethane via VLECs

GAIL, India’s main gas pipeline operator, is trying to revolutionize its Petchem facilities by replacing current feedstocks with ethane imported from the US to make up for shortages caused by the government’s prioritization of natural gas for other sectors. The profitability of GAIL’s Petchem units has suffered significantly in the face of volatile prices and supplies in the world market.

To this end, GAIL has issued an Expression of Interest (EOI) to charter a Very Large Ethane Carrier (VLEC) for 20 years with an option to extend for a further five years. Interestingly, in order to fully utilize the ship, GAIL intends to use the same ship for the joint transport of ethane and LNG in different departments. The move is part of GAIL’s broader strategy to improve operations and increase output, including the planned 500 ktpa propane dehydrogenation (PDH) plant in Maharashtra. GAIL already operates the PATA Petchem complex in Uttar Pradesh with 996 ktpa of proprietary ethylene capacity for HDPE/LDPE production.

Growing importance for the ethane trade

Ethylene, a by-product of ethane recovered from liquid natural gas streams or manufactured in refineries, is a key intermediate for the petchem industry, fueling the development of a wide variety of products that make up our modern world. Ethane has traditionally been overlooked in favor of other commodities, but the shale boom has turned the tables.

With its low price, Ethan has become a Petchem superstar, resulting in a spike in its production that shows no signs of slowing down. In fact, between 2017 and 2022, U.S. ethane production has skyrocketed at a remarkable CAGR of 9%, while domestic consumption has increased by 8%. And the rest of the world has taken notice, as exports of ethane have increased by an impressive 18% over the same period, making it a critical global commodity powering the modern world.

U.S. ethane use in the Petchem sector has increased over the years as the cheaper gas is fed into domestic crackers. After that, Reliance, India’s largest petchem operator, was the first company to import ethane on ships, followed by a series of ethane crackers entering the market in China.

Almost all of the world’s seaborne ethane exports are from the US through Marcus Hook and Morgan’s point terminal, while China, with imports approaching 3.4 million tonnes in 2022, will feed the new and existing ethane cracker plants to become the largest importer of US ethane in the country.

The future for ethane as a Petchem feedstock is bright with stable prices compared to propane, natural gas and naphtha. This stability offers comparatively better cracking margins (ethane was 40% cheaper than propane in 2022). Ethane production is also very flexible, with natural gas operators increasing ethane rejection during periods of low prices or increasing production when ethane prices are high. Due to this flexibility, stable domestic demand and increasing natural gas production, ethane production is expected to increase while prices are expected to remain stable.

Petchem operators are increasingly trying to create flexibility in their raw material intake to take advantage of price spreads.

GAIL to Reliance

GAIL is considering replicating the Reliance model, the latter of which began importing US ethane in 2014 and became the first company in the world to order and deploy a VLEC for the purpose. The company now has a fleet of six VLECs that it co-owns with MOL.

With ethane imports of approximately 1.6 mtpa, Reliance reduced its propane and naphtha consumption at its Petchem plants in Dahej and Hazira, saving approximately US$450 million annually. India’s ethane imports surpassed 2 million tons in 2022 at 2.2 million tons.

Strong VLEC growth

Increasing ethane demand from the Petchem sector has supported the increase in the global VLEC fleet, which has grown at a CAGR of 30% between 2017 and 2022. We further forecast fleet growth of 12% CAGR between 2022 and 2027 after considering projects under construction in China and Europe.

The current order book contains 13 VLECs, including the 12 VLECs ordered in 2022. All existing and ordered VLECs are secured by long-term charters, typically 15 years, and are traded on fixed routes. We estimate that the TC rates for the ships are around $1.5 million per month.

Ethane is also traded on smaller 27 kcbm and 37 kcbm Sr-ethylene (special semi-refrigerated cargo ships capable of transporting ethylene) and multi-gas cargo ships. For example, Ineos has eight 27 kcbm Dragon-class multi-gas tankers (capable of carrying LNG, LPG and ethylene) on multi-year charters for the transport of US ethane to Europe.

Navigator Gas has four 37 kcbm and one 21 kcbm Sr ethylene vessels in multi-year charter agreements with Borealis, Zhenjiang Satellite Petchem and Ineos.

Smaller vessels either serve smaller plants in Europe or are used as a stopgap until the VLECs are built and delivered as the former are not very cost effective. Meanwhile, better economics of ethane utilization in the petchem sector will continue to improve the commodity’s trading prospects.

Petchem margins were weak for most of 2022 due to low downstream demand and higher commodity prices, but operators using ethane as a commodity fared better than their peers. The attractive economics favoring ethane are expected to lure more operators towards the commodity, which in turn will increase demand for VLECs.
Source: Drewry