* China bought first U.S. LPG in 2013
* But Sinopec-Phillips 66 deal signals involvement of big oil
* China now looking at using fuel to make petrochemicals
* U.S. exports of LPG could roughly triple by 2020-analyst
* To heat up competition with Middle East suppliers to Asia
By Chen Aizhu
BEIJING, April 10 A deal between China's top refiner Sinopec Corp and Phillips 66 could be a game changer that signals the United States is on track to become one of the top suppliers of liquefied petroleum gas (LPG) to the world's second-biggest economy.
China is the biggest consumer of LPG, a compressed mix of propane and butane, used for heating and transport, and now increasingly being considered for making petrochemicals.
As demand in China soars, the U.S. shale boom has led to a surge in production of LPG, which is bringing down global prices and challenging established suppliers in the Middle East.
Washington restricts exports of crude and has only slowly opening up liquefied natural gas shipments for energy security reasons, but there are no such limits on LPG sales.
China's first purchases of U.S. LPG were made last year, amounting to 3,530 barrels per day, according to Chinese customs' data, in deals done by little known private firms.
But marking the entry of big oil Sinopec Corp and U.S. refining company Phillips 66 struck a deal last month to supply U.S. LPG for delivery likely to start in 2016 and put by traders at about 34,000 bpd worth around $850 million at current prices.
Sinopec, China's top ethylene producer, is looking at using U.S. LPG for making petrochemicals due to cheaper pricing and shortages of the traditional feedstock naphtha, a product from processing crude oil.
"The U.S. shale boom could lead to a fresh way of developing China's petrochemical sector," said Mao Jiaxiang, deputy head of Sinopec's research arm, China Petrochemical Consulting Corp.
"We're evaluating the competitiveness of U.S. light-end feedstocks versus naphtha as a petrochemical feedstock," added Mao.
U.S. exports of LPG could roughly triple by 2020 from last year to around 635,000-795,000 barrels per day, energy consultancy FACTS Global Energy estimated.
China has lined up about 100,000 bpd of long-term U.S. LPG imports with supplies mostly starting in 2015-16, including the Sinopec deal and otherwise mainly involving smaller firms, traders said. China's total LPG imports could reach half-a-million bpd by 2020, up nearly four-fold from last year and overtaking other key Asian importers such as Singapore and Indonesia, they said.
"The supply overhang of U.S. LPG...would put America in direct competition against the Middle East, vying for the China market," said Al Troner of Houston-based Asia Pacific Energy Consulting.
Middle East suppliers such as Qatar, the United Arab Emirates and Saudi Arabia together supplied 80 percent of China's LPG imports of 132,000 bpd in 2013.
China is the world's largest LPG consumer, using about 874,000 bpd, though the bulk of this is for heating or transport
and only 5 percent is used in the petrochemical sector.
Most of China's own LPG supplies come as a by-product in refineries and normally contain olefins containing coke that can create unwanted residue in steam crackers that makes it more dirty and expensive to use as a feedstock for petrochemicals. LPG from gas fields contains no olefins.
Colin Shelley of FACTS Global Energy said that China's imports had the potential to rise sharply now that LPG was being increasingly looked at as a feedstock to make petrochemicals.
"Sinopec is taking the lead. We may see CNOOC, we may also see PetroChina," he said.
Last June, Sinopec proposed building a $3.1 billion ethylene plant in eastern China, which would be the company's first to use natural gas and LPG as a feedstock.
CNOOC, parent of CNOOC Ltd, is also considering using LPG for its new 1 million tonne-per-year cracker in Guangdong province, said a company official.
Currently traders estimate U.S. LPG costs roughly $850 per tonne, $50-100 per tonne lower than Middle East supplies for May delivery to China.
It is also cheaper than naphtha for China delivery at about $1,000-1,200 per tonne.
The bulk of China's 100,000 bpd U.S. LPG orders is due for delivery from 2015-2016 when U.S. export facilities are completed and after an expansion of the Panama Canal to allow through bigger tankers, known as very large gas containers (VLGC), to cut the journey time to Asia by more than two weeks.
LPG is transported in tankers at around minus 40 degrees Celsius, although not super-chilled to the extent of LNG at about minus 160 degree Celsius.
Apart from Sinopec, other Chinese buyers of LPG are mostly private investors in propane dehydrogenation (PDH) plants, which process propane into propylene, used in plastic products.
China's Tianjin Bohai Chemical Industry Group launched in September a 600,000 tonne-per-year PDH plant in the northern city of Tianjin, the first of about 10 such plants being built or planned to cash in on a shortage of propylene.
The plants have been tying up with U.S. LPG firms such as Enterprise Product Partners and Targa Resources Corp . (Additional reporting by Seng Li Peng in Singapore; Editing by Ed Davies)