The World Liquefied Petroleum Gas Association (WLPGA) reported that 317 million tonnes of Liquefied Petroleum Gas (LPG) was produced globally in 2019, with a growth rate of 3.6%. As other commodities, (such as grains, metals, or oil), LPG is traded globally between different regions of the world in the same manner as other commodities traded on exchanges.

Exchanges serve to bring together dealers and traders who buy and sell commodities, whether for immediate delivery (Spot Market) or for future delivery (Futures Market). The spot price of a commodity is the agreed upon price a commodity will be sold for on that day, e.g. the Mont Belvieu exchange trading LPG at 20 tonnes of LPG at 1.8 million naira on the 8th of June, 2020. This was not a pre-determined price, this was based on trades agreed on the aforementioned day, and the price of 20 tonnes of LPG on the Mont Belvieu exchange is expected to change on the 9th of June, 2020 (i.e. the next day). Hence anyone purchasing LPG on the Mont Belvieu will pay the price for that day and expect immediate delivery of the purchased LPG.

The futures market differs as the prices are agreed on before the exchange of commodity occurs and payment is made.

Spot Markets in the LPG Industry
To be exact, a spot market is not exactly the same as an exchange, as the prices are actually set by the two parties involved in the trade; hence it is referred to as Over-The-Counter (OTC). The spot market is not as organized as an exchange; there is no trading floor. ‘Spot Market’ refers to all spot transactions concluded in an area where large volume of trading activities of a commodity (LPG in this case) takes place. To this end, spot markets are region-specific. some major trading points include Saudi Arabia (Ras Tanura), United States of America (Mont Belvieu), Japan, Northwest Europe, Mediterranean, amongst others, all of which are hinged on the trade deals of specific locations within them.

Furthermore, the prices for which LPG is traded is made available by companies which follow the trades by obtaining first-hand information from the traders. These companies include Argus Media, Poten & Partners, OPIS (Oil Price Information Services), Platts, amongst others. Each company has different but similar methodologies in determining the record e.g. OPIS has a volume range considered for assessment, while Argus only has a minimum volume threshold.

Major LPG Trading Points

1. Mont Belvieu: Mont Belvieu, a small town in Texas, United States of America (USA), took advantage of its naturally occurring salt domes formations to serve as destination for storage facilities for propane. The town also has extensive gas processing facilities, pipeline access, and waterborne terminals. OPIS describes Mont Belvieu as the world’s compass for LPG price direction. Its strategic location along the USA’S gulf coast has made it a prominent export facility for trading LPG. There are other trading points in the North American region, but Mont Belvieu is the most relevant. Nigeria Liquefied Natural Gas (NLNG) trades LPG based on Mont Belvieu prices (the USA is Nigeria’s major LPG trading partner).

Mont Belvieu LPG can be divided into TET and non-TET, where TET (Texas Eastern Transmission Cooperation) represents products deliverable at the Texas Eastern Products Pipeline Co, LLC (TEPPCO) storage facility in Mont Belvieu, or anywhere within the TEPPCO system. Non-TET LPG refers to product traded in the Mont Belvieu Caverns Facility (the Caverns is a subsidiary of the Enterprise Products Partners, LP). Prices differ occasionally. OPIS prices form the basis for LPG trade in the USA.

2. Saudi Arabia: the national oil company of Saudi Arabia, Saudi Aramco, was initially owned by Standard Oil Co. of California (now Chevron). A wider joint venture arrangement was formed with other International Oil Companies (IOCs) to form the Arabian American Oil Company (Aramco). In 1988, the company became fully owned by the Saudi Arabian government.

Aramco initially priced its LPG based on thermal parity link (prices equivalent to that of oil on the basis of British Thermal Units). The other Middle-eastern LPG exporters followed suit. To control profit margins on their product due to seasonal influence of LPG trade, Saudi Aramco retained the base thermal link formula to crude then adding 50% of the difference between spot LPG prices and the formula above US$15 per tonne. Other Middle-Eastern LPG exporters followed. Their involvement with the growing Chinese LPG market caused Saudi Aramco to establish a monthly spot market driven contract price for propane and butane. The spot price from Saudi Aramco is referred to as Saudi CP (Contact Price).

In 2005, Saudi Aramco began using their own spot sales, customer liaison feedback and published spot sales (such as Argus, Platts, etc). By 2009, 80% of the Asian LPG was directly or indirectly influenced by Saudi Aramco’s prices. Saudi Aramco’s LPG prices appear to be somewhat influenced by market assessments made by Argus i.e. Argus Far East Index (FEI), and Platt. Although the price of LPG from the Argus FEI and Saudi CP are close, they are not the same, because Argus methodology does not cover every single trade in that region; it only covered 20-30 daily participants (2009). This causes discrepancies between the values, but they are quite negligible.

Comparing the Mont Belvieu and Saudi CP, it is observed that they largely follow a similar trend in pricing. It is also observed that the Saudi LPG costs more than the Mont Belvieu LPG. The graph below shows both markets have been experiencing gradual price reductions in the past two years, and this can be attributed to the corresponding fall in oil prices.

It should be noted that countries or regions which host spot markets play major roles in determining what happens in the LPG industry because they host a noticeable percentage of global trade. Likewise, those countries or regions without local spot markets depend on the decisions of others which may come with some losses(e.g. the Nigerian LPG market price is highly dependent on Mont Belvieu spot prices, which increases the cost of even locally sourced LPG).

CONCLUSION
The LPG industry, similar to the oil industry, does not have a globally accepted price at which it is traded. Rather, the trading price is agreed upon by the parties involved in each trade, either for immediate purchase and delivery of the commodity, or for future purchase and delivery of the commodity. Market quotation services are provided by companies such as Argus, OPIS, Platt, etc to give a good idea of the trading price of LPG (or other petroleum products) for a specific period and place. Their methodology determines how relevant they are (due to price discrepancies), but they give close estimates nonetheless.

The Nigerian LPG market is expected to hit the 1 million tonne consumption mark by the end of 2020 – judging from the 5 million tonne target for 2023, after which the Nigerian market will be able to determine spot prices to be used in the country (or the West African region at large). Achieving this will be the beginning of Nigeria’s journey in becoming a major player in the global LPG industry, just like Saudi Arabia or the United States of America.



KiakiaGas Limited is a leading Gas business in Lagos,Nigeria with expertise in LPG retailing, New Gas Market development, Building of Gas Plants and Gas strategy advisory
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