Natural Gas Engagement a Hot Topic at World LPG Forum

Opportunities resulting from the historical low price of LPG and suggestions that the world LPG industry should be more engaged with the natural gas industry were among the various hot topics under discussion during the World LPG Forum, which took place Sept. 28 to Oct. 2 in Singapore.

James Rockall, CEO of the World LPG Association (WLPGA), told BPN after the event that the Forum usually focuses more on the distribution side of the business and on cylinders or tanks. But “Expanding Horizons” was the theme for this year’s event, and the association sought to move “beyond the bottle.”
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“Our industry is bigger than that,” Rockall explained. “Our industry involves companies that are producing LPG and who are shipping it. The investment that we’ve seen in the shipping industry in the last year or so is immense. We have companies who are trading LPG, and we have companies who are using LPG in large volumes for things like big-scale power generation. The scope of our product is a lot broader than [what] perhaps we normally focus on. So expanding our horizons as an association was something that was also important to us. Reaching out beyond the normal customer base to the larger industry was really important.”
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Seeing the natural gas industry as more of a partner than competitor was a topic of discussion that fit the “Expanding Horizons” theme of the event. Rockall noted the similarities of LPG and natural gas make them “essentially the same product” for residential and industrial customers — they come from the same place and are consumed almost in the same way. Somewhere in the middle of the production process, the two products are separated, and competing companies transport it and sell it, but Rockall contends that natural gas is not the propane industry’s biggest competitor.
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“Our biggest competitors are [energy sources] like electricity or biofuels, and we need to make sure that gas as a bigger industry is represented and that we support each other and advocate together,” Rockall said.

David Carroll, president and CEO of the Gas Technology Institute (Des Plaines, Ill.) and president of the International Gas Union (Vevey, Switzerland), spoke during the opening roundtable at the World LPG Forum about the synergies between LPG and natural gas. “He’s very knowledgeable about LPG,” Rockall noted, adding that WLPGA, working with Carroll, can help the LPG industry reach more people who don’t have access to natural gas.

“If we can leverage that advocacy potential of the natural gas industry to support our market development, we can really work together.”

The low price of propane has presented opportunities for the industry to compete better with other energy sources, and that was another hot topic of discussion at the Forum. Rockall and other attendees at the World Forum in 2014 were surprised at how low propane prices had fallen. By the time the event this year in Singapore started, prices had dropped even further. Presenters and attendees at the World LPG Forum noted that the decline in price creates big opportunities to compete with other energy sources.

That will help because, in the past, people thought of propane as expensive compared to charcoal, wood, and other energy sources in developing countries.

But lower prices have “given the industry a huge opportunity to extend its reach into markets that otherwise were maybe a little difficult to penetrate,” Rockall stated.

He has heard comments in the past that the LPG industry is seen as old-fashioned, but that perception is changing, and innovation could be seen all over at this year’s Singapore event. He described this year’s Global Technology Conference at the World Forum as the best conference yet. The 10 papers presented (BPN, August 2015, p. 27) “described commercial opportunities the industry can exploit for further volume in a way that perhaps we haven’t seen before,” Rockall noted.

He was particularly impressed with a paper by Samik Kumar Hait, et al., of Indian Oil Co. in India titled, “Development of Nanoadditized High-Therm LPG for Metal Cutting Applications,” which describes how LPG can be a less hazardous alternative to oxy-acetylene for steel fabrication.

Acetylene is extremely dangerous, Rockall explained. But the addition of a proprietary nanoparticle to LPG can result in much lower costs for flame cutting, and provides the safety benefits of LPG. “These are the kinds of things that can make enormous benefits all over the world, not just the developing world. These kinds of opportunities are out there for propane.”

B. Ashok, chair of Indian Oil Co. and who recently joined the board of WLPGA as vice president, provided the World Forum’s opening keynote address. He discussed a new direct cash transfer program for propane cylinders in India in which the government subsidy for domestic cylinder costs is transferred directly to people’s bank accounts. This allows cylinders to be sold at market price, eliminates the unsafe use of cylinders in domestic applications, and avoids the leakage of subsidy from the target consumers. Rockall believes helping lower-income people afford propane is important, and he thinks other countries can adopt similar programs.

Rockall remembered a portion of Ashok’s presentation that stated 70% of India is rural, and only 25% of the rural market is connected to LPG, meaning a large portion of the country offers opportunity for LPG sales. He noted that India’s rural population is larger than the population of the U.S., Canada, and the European Union combined, which further illustrates the growth opportunities for LPG, along with cylinder, valve, and appliance sales.

The next World LPG Forum, to be held in Istanbul Sept. 27-29, 2016, will highlight additional innovation. The event, in partnership with the European LPG association, AEGPL, will feature the theme, “A Bridge to the Future.” Istanbul is located between Europe and Asia, which have some of the greatest potential for LPG growth. Rockall believes LPG around the world will see growth in the coming years.

“I have the sense that our industry is headed toward something big,” he said. “I heard it a few times at the conference in Singapore. People are saying that they have the feeling the industry is at its tipping point, and that we’ve put in a lot of work over the last few years to raise awareness about a lot of issues. But with the circumstances that we find ourselves in now with prices, the awareness of growing air-quality problems, and also increased understanding that LPG can be a solution to those problems, it seems to be coming together.”    —Daryl Lubinsky

Villa Carlotta Goes Green

Overlooking majestic Lake Como in northern Italy is Villa Carlotta, a 17th century national treasure visited by more than 200,000 persons each year. Around 70% of these visitors live outside Italy, making this an attraction with worldwide appeal. The world-class historic site is famous for its more than 70,000 square meters (or more than 17 acres) of gardens, which are among the most beautiful in Europe.  In addition to its gardens, the villa has many precious artistic treasures, including some famous masterpieces by the sculptor Antonio Canova.
GreenGear 1The villa, built at the end of the 17th century by the Milanese marquis Giorgio Clerici, was purchased in 1801 by Gian Battista Sommariva. His heirs sold the villa in 1843 to Princess Marianne of Nassau, Albert of Prussia’s wife, who gifted it to her daughter, Carlotta, thus the origin of the name Villa Carlotta. Its garden-park features a variety of plant species, stairs and terraces, and statues and fountains.

Villa Carlotta’s management has been at the forefront of recognizing the importance of keeping the pristine condition of its environment. In September, Villa Carlotta’s management group signed an agreement with GreenGear Global Ltd., an English subsidiary of the Cavagna Group (Brescia, Italy) for its GreenGear propane outdoor equipment to care for the gardens at the villa. Using the propane-fueled products, Villa Carlotta is carrying out yet another concrete initiative in favor of its surrounding environment.

The team came to this decision because propane is widely known as an environmentally friendly fuel, being the best alternative to traditional (and polluting) gasoline. This outdoor equipment fits perfectly with the site’s environmental commitment.

The full range of GreenGear products will be available to the Villa Carlotta gardeners during the agreement. However, for the first six months they will mainly use self-propelled mowers (model P22-in.), ride-on mowers (model zero-turn 46-in. and 20-hp), power wheelbarrows, mini-transporters, and water pumps. Tillers and bio shredders will be used according to specific needs. GreenGear 3-kw and 7-kw  power generators running on propane will also be used.   

During the event dedicated to announcing this partnership, the managers of Villa Carlotta pointed out the importance of this collaboration and the meaning of this agreement. Maria Vittoria Bianchini, president of Ente Villa Carlotta, declared that “Villa Carlotta has always been committed to promoting technological innovation in fuel systems and in the management of our green spaces, while still remaining faithful to tradition. I am glad that this partnership is able to support the Villa’s evolution; in fact, it brings our operational management in line with the highest environmental standards, while at the same time allowing us to save money by using propane.”

The Cavagna Group was also very pleased with such a prestigious partnership. Davide Cavagna, CEO of the Cavagna Group, commented, “It is truly an honor to link the GreenGear brand name with that of Villa Carlotta.”

Moreover, Villa Carlotta has also decided to adopt Cavagna’s propane technology in order to transform the heating system of its museum and greenhouses, which will now use propane fuel. Today, the greenhouses are heated through a diesel system that is old, expensive, and polluting. Also, many man hours are spent on the daily refilling and maintenance. The heating devices are not capable of assuring a balanced heating in all the greenhouses since the heaters are concentrated near the entry points. The new system will be based on 1650- and 5000-liter propane tanks with new and appropriate boilers and burners and new specific greenhouse heaters that are distributed in several well-selected places within the greenhouses.
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The museum situated within Villa Carlotta is under the control of the Italian Ministry of Culture, thus no major work can be done on the dwelling. The solution to its updated heating needs will be carried out using propane. Heaters using 5-kg cylinders coupled with forced air portable heaters and 10-kg cylinders will allow the museum to be opened during the winter for events and concerts during the seasonal closing of the gardens.  

This strategy is based on an energy efficiency plan developed in collaboration with the Italian group Autogas Nord. “I am very proud of this partnership,” added Giorgio Basaglia, director of GreenGear Global Ltd, “because Villa Carlotta… is a model of operational excellence, which meets the highest environmental standards.”

New PERC Campaign Accelerates Propane School Bus Education

The number of schools moving to propane-fueled school buses has rapidly increased in recent years, and the Propane Education & Research Council (PERC) is stepping up its work to get many more schools on board. Recognizing that schools across 45 states now use a total of more than 7000 propane-fueled buses, PERC in October launched the Better Our Buses campaign to educate parents, school officials, and community members about the benefits of fueling school buses with propane. Benefits include the fact that propane buses start right up in cold weather, while diesel models can take up to half an hour just to warm up before driving, putting that much more pollution into the air. PERC president and CEO Roy Willis told BPN that the Better Our Buses campaign, based on “earned media” coverage of campaign events, is a micro campaign that is a precursor to a broader, national consumer awareness campaign to promote propane’s advantages and versatility. PERC will launch the national campaign in 2016.
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For the Better Our Buses micro campaign, PERC hired Jenna Bush-Hager as a celebrity spokesperson. Bush-Hager, who is the daughter of former U.S. President George W. Bush and is a journalist and former teacher, appeared at the campaign’s opening event in October at Lilla G. Frederick Pilot Middle School in Massachussetts. PERC donated $10,000 for the school to purchase supplies for its classroom. Separate from Hager, PERC held similar events and made donations to additional schools: St. Francis Independent School District in Minnesota, Friendship Independent School District in Texas, Adams 12 5 Star in Colorado, Kyrene Elementary School in Arizona, and Reynolds School District in Oregon. The council will hold two more events at schools in Broward County, Fla.
“It’s clear when you talk to school administrators and transportation departments that they are saving more than just dollars and cents by going with propane buses,” Hager noted in a PERC press release about the event. “The switch is improving their school as a whole and giving them the opportunity to invest in more teachers or school programs.” PERC Bus SB3
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Willis added that the campaign is designed to elevate public awareness of propane as a clean fuel alternative for student transportation. The targeted school districts have already adopted propane buses, and as part of the program, PERC is also contributing to, which solicits donations for classroom supplies and materials.

How is a donation to part of PERC’s mission? Willis noted that a 30-second prime-time television or radio ad in Boston would be expensive. But the council ceremony in which it donated to the program probably received five times more air time than a 30-second paid spot would have provided. So the donation brought high visibility to the propane industry and publicity for the benefits of propane school buses.

“It’s what’s known as ‘cause marketing’,” Willis explained. “We believe you can do well by doing good.” PERC has been involved in school bus projects for at least 10 years. Bluebird several years ago was in the middle of developing a General Motors school bus with a propane system. As momentum began to build toward propane school buses, the financial crisis of 2008 hit, and General Motors went into bankruptcy, pulling out of the commercial market (and not re-entering that market until this year). With PERC’s funding and marketing help, Bluebird went on to develop a Ford product with Roush CleanTech (Livonia, Mich.).

Willis explained that PERC functions as a “technology incubator,” working with manufacturers to cover engineering and design costs to get products ready for market, then collaborating with the manufacturers on marketing programs to build market share.

“That’s what this Better Our Buses effort is really about, that marketing collaboration,” Willis said. The campaign focuses on school bus fleet managers and the general public, but also toward more influential final decision makers such as school administrators.

The Better Our Buses school bus campaign is one of PERC’s early public relations projects since the council announced this past April that a U.S. Department of Commerce restriction on its public education activities had been lifted. Willis commented that the new campaign illustrates how much the media environment has changed since the restriction went into effect in 2009.

“We’ve been working to take advantage of those digital online channels that enable us to tell the propane story in ways that we were never able to do before,” he said.

Fleet managers and school officials share online videos that they see on PERC websites and other media. PERC is working to create tools that support peer-to-peer conversations. People are talking on various media about many products that use propane, including products such as school buses, boilers to replace their old fueloil equipment, landscaping equipment, or irrigation engines.

“The experience with propane is positive enough that people are willing to sit in front of a video camera and tell the story,” Willis stressed. “People don’t do that if they’re reluctant about the experience. But people that are using propane and the new propane products in the marketplace are having a very positive response to it, and having been part of developing much of that equipment, I have to admit I’m very enthusiastic about the consumer response to the products that we sort of helped bring to the marketplace.”

PERC will use tools such as satellite media tours for other products as well. Willis explained that for the school bus satellite media tour, Bush-Hager will appear at television and radio station studios, and several media outlets can interview her remotely in one day. Willis added that he has done satellite radio media tours and talked to 15 to 20 radio stations in a two-hour stretch. “You make yourself available to hundreds of potential media outlets.”    —Daryl Lubinsky

Record Inventory, Natural Gas Expansion Current Board Topics

While the propane industry’s fuel supply situation looks amazing headed into the heating season, proposed subsidized natural gas expansions backed by deep-pocketed political donors are causing headaches in some states. The National Propane Gas Association (NPGA) Board of Directors, meeting in New Orleans Oct. 4-6, received confirmation of what is already widely known, that primary U.S. propane stocks are sky high, and also that they’re expected to remain so well into 2016. At the same time, NPGA is working with state associations under its State Engagement Initiative to combat natural gas expanding into so called unserved or underserved areas using ratepayer funds.
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In a presentation to the association’s Supply & Logistics Committee, Debnil Chowdhury, director and manager of North American natural gas liquids at IHS, noted that mid-continent, or PADD 2, propane stocks, which fell dangerously low during winter 2013-2014, kicking off supply, transportation, and price-spike woes, are expected to remain high. The Energy Information Administration (EIA) reported Oct. 21 that as of the week ended Oct. 16 inventories in the region stood at nearly 28 MMbbl, slightly above the year-ago total.

However, there is the potential stocks could be drawn down based on drivers on the Gulf Coast, PADD 3. Among them: ramped-up exports and petrochemical cracking, which could pull on Midwest supplies. For now, however, Midwest propane inventories are near the average range. Going forward, PADD 2 production growth is forecast to be lower in 2016 due to lower crude prices, but even with that potential slowdown production is at twice the level of 2008.

Meanwhile, Gulf Coast propane stocks, at just over 62 MMbbl as of mid-October, according to EIA, remain extremely high, and IHS expects another year of those elevated levels before a return to normal. That forecast assumes high export volumes due to the Enterprise Products export terminal expansion and the Phillips 66 export facility startup. But if the terminals are not strongly utilized due to tempered demand in Asia and Europe, Chowdhury commented, stocks will likely follow a higher trajectory similar to 2015 in 2016. He added that the Enterprise expansion will be in operation several months before winter 2016-2017, and that data IHS obtains from its IHS Waterborne service will allow more accurate gauging of the inventory situation this summer.
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East Coast, PADD 1, propane stocks have fluctuated wildly throughout the year, but should remain on the high side of the historical range, the IHS director said. Although inventory levels are depressed this year, propane production from gas processing continues at high levels as Marcellus and Utica shale production continues to grow. It is expected that the pace of production growth will be strong and lead to higher stock levels in 2016. EIA pegged mid-October stock levels at nearly 6.8 MMbbl.

In other good news on the inventory front, Rockies and West Coast, PADDs 4 and 5, propane stocks are the highest of all regions on a percentage basis. Volumes in the Rocky Mountain region are expected to remain high, while West Coast supplies are forecast to remain above average. For the week ended Oct. 16, EIA had combined Rocky Mountain/West Coast volumes at almost 4.7 MMbbl, some 1 MMbbl above last year. Chowdhury detailed that about 80% of West Coast propane supply is sourced from crude oil refining, and that no propane-based petrochemical crackers are located in PADD 5, making cracking economics and chemical demand in the region irrelevant.
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Overall, U.S. propane stocks, already at record levels, will remain high well into 2016. Further, Chowdhury recounted that primary propane stocks in every region of the U.S. have spiked and plunged over the past three years: record high inventories in winter 2012-2013, record low volumes in winter 2013-2014, and new higher record supplies in 2014-2015. “These fluctuations are the result of both new dynamics and short-term anomalies—weather and supply outages—in the U.S. market,” he said. He added that rapid increases in propane supplies from gas processing due to shale gas production and reduced use of propane as a feedstock to ethylene plants during the first half of 2014 worked to boost inventories, while simultaneously strengthening the case for exporting surplus propane and for building new export infrastructure.

“Natural gas plant propane has increased substantially, while refinery propane has remained little changed despite high refinery utilization,” Chowdhury said. “Propane production is not as high as crude runs would indicate. It’s widely recognized that operators are burning propane in refinery operations, up to 20,000 to 30,000 bbld that isn’t showing on DOE [Department of Energy] reports.”
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He outlined that the current domestic propane supply environment is characterized by high production of natural gas along with correspondingly low prices, and that recent attractive gas processing margins have declined. A plunge in rig counts will slow U.S. natural gas production growth, but only temporarily, because a backlog of drilled but uncompleted wells in 2015 will enable gas production growth in 2016-2017 as infrastructure comes online and power and industrial demand rises.

At the same time, operators are drilling the most productive acreage, and productivity is improving as completion times decline. Completion costs are down 15% to 20% from the 2014 first quarter to the first quarter of this year. Service cost deflation reduces breakeven costs, enabling more gas production at lower prices. In addition, LNG liquefaction capacity is scheduled to climb from 1.2 Bcfd in 2016 to 7.4 Bcfd in 2020. Lower 48 propane production growth from natural gas sources will be strong, but slower in pace. On the crude oil side, production is projected to decline, but propane is also supported by non-associated gas.

“Today the crude market is in drastic decline, and oil and gas rig counts are both falling,” Chowdhury said. “But even as gas rig counts fall, we haven’t seen a dry gas production cut. Productivity is improving and production costs are down. We’re definitely seeing the effects of lower crude prices in the $40/bbl range, not $60/bbl.” In the ongoing low-price energy commodity environment, propane production growth, while continuing to rise, will be slower than in the last five years.

On the demand side, Chowdhury said the residential and commercial markets will experience their normal ramp-up this winter, but won’t be as strong. Not much growth is seen in those sectors. Weather forecasters are calling for a warmer winter in 2015-2016, therefore the expectation is for slightly lower residential/commercial demand. “We expect agricultural propane demand to be slightly higher than last year due to high precipitation,” he added, while noting that many crop farmers had filled up with cheap propane over the summer, which will blunt some fall harvest season orders.

On the petrochemical side, IHS sees increasing demand for propane dehydrogenation (PDH) plants of 25,000 bbld. Chowdhury highlighted that the U.S. is also one of the cheapest sources of ethylene in the world, third after the Middle East and western Canada, and that U.S. ethylene plants are running at high rates. “Over the past few years, ethane has generally been a much cheaper feedstock, and this cheap ethane has been displacing some propane use as a cracker feedstock,” he said.

He expanded that “high prices for propylene occasionally increases cracker demand for propane, and lower crude prices and its effects on propane prices led cracker operators to change their feed slates. Propane demand increased due to the narrowing of cash costs.” The NGL service manager recalled that propane cracking rates were increasing after the Great Recession, but plummeted in 2014.

Echoing what is widely recognized, Chowdhury observed that U.S. propane exports have set new record highs every year since 2008, and waterborne exports will continue to increase as supply rises and inventory remains high. And while a large amount of additional LPG export terminal capacity has been proposed, some will not be built. Nonetheless, the U.S. will remain the world’s largest LPG exporting country.

“There is too much production in the U.S.,” he asserted, “despite exports, use in refinery operations, and autogas. And there hasn’t been a strong push in the U.S. for autogas. Most money continues to be spent on promoting hybrids and electrics.” He added that exports were not a topic of discussion five years ago, but with 615,000 bbld expected to leave U.S. shores by the end of this year, they certainly are now. “Most exports are tied to propane, however, butane has a similar story with 200,000 bbld in exports,” Chowdhury said. “But propane remains favored in the spot market.”

He commented that while not all proposed new terminals will be constructed, the majority will. “This ability to export has changed the entire world market. The U.S. is now the largest exporter of LPG mix, and India and China prefer mix. The key point is that we have gone from not being a player to being the largest exporter. This in turn has made world prices much more important. An outage in the U.S. will affect the world price. March/April flooding in Houston and resulting problems with brine ponds, and a collision in the Houston Ship Channel both interrupted exports.”

Where are exports going? “Initially to Latin America, a mature market, where U.S. barrels pushed out West African barrels,” Chowdhury explained. “The future is directed at Asia.” He added that most nations’ import needs have not changed, but that sourcing has moved to the U.S. and away from the Middle East. Meanwhile, more Middle East LPG is moving to India. Furthermore, any reduction in U.S. LPG export growth over the long term will most directly impact Asia and Europe. Japan, China, Taiwan, and South Korea have been getting more of their LPG outside the Middle East, and more Middle East volumes have been consumed in South Asia and Southeast Asia.

The IHS Waterborne subscription service shows an 18% year-on-year increase in U.S. LPG liftings last year. Bolstering those waterborne liftings, very large gas carrier (VLGC) fleet capacity is being added rapidly over the next two to three years, despite some scrapping. In addition, 2017-2018 freight rates will decline with the buildout of ships. Another pillar for exports are U.S. propane prices, which are discounted, moreover disconnected, from world prices. Although prices are drawing closer, they nonetheless remain discounted, and must remain so in order to clear exports. Finally, lower prices depend on high surplus propane inventories in the U.S., well above and beyond domestic demand.

IHS sees the crude-to-gas price ratio becoming more favorable for crude-related feedstocks such as propane. The price ratio between crude and natural gas has declined, but is expected to recover. Therefore, propane prices should recover over the next two years. The consultancy is calling for crude prices to rise in 2016, and especially in 2017, buoyed by demand growth in China and India. Crude growth of 1 MMbbld is forecast over the period for China alone.

Concluding, Chowdhury said the IHS propane forecast could be affected by crude oil prices. Higher or lower crude prices would affect global LPG prices. Substantially higher or lower oil prices would also affect propane production. In addition, propane inventories in the U.S. need to be well stocked. If volumes fall too low, propane prices would ultimately rise and deter exports. Another player is the global petrochemical market. Propane and butane are used internationally as feedstocks for ethylene production. A weak petrochemical market would put downward pressure on LPG prices, whereas a strong market would conversely support prices. Ultimately, a weak or strong global economy will have the final say, with the results being the same.

Natural Gas Expansion
Since the beginning of this year, NPGA has been identifying key issues in states that have the potential to adversely affect industry operations. Front and center, and the most significant threat identified, are subsidized natural gas expansions in the residential market. Working with state executives, NPGA has been helping states fight damaging legislation. The association’s Executive Committee has allocated up to $500,000 for proposals from state associations in this and other areas under the State Engagement Initiative, which supplements state efforts to influence the outcome of legislative and regulatory battles.

The first program under the initiative was opposition to H.B. 4303 in Michigan, which would allow ratepayer funds to be used for natural gas expansion projects. Another such effort was launched in Minnesota in August. The Michigan Propane Gas Association (MPGA) launched a grass roots and social media effort to educate legislators and the public on propane benefits. Using a new website,, the propane industry addressed misconceptions and generated more than 150 messages to legislators. The grass roots program also included an e-newsletter that encouraged communication with elected officials. A social media campaign on Twitter, Facebook, and LinkedIn also shared the propane message.

Derek Dalling, MPGA executive director, said at press time that the H.B. 4303 sponsor, a Republican energy committee chairman, had 10 votes lined up in the committee to advance the subsidized natural gas expansion legislation. Thirteen are needed. But those three additional aye votes, for now, appear beyond his reach this legislative session. Testimony was heard in June, and since then the bill has languished in committee.

Dalling notes the same legislation was also introduced last year, signaling supporters have dug in for the long haul. “The energy committee chairman has also passed off the bill to a freshman house member for sponsorship, so for the next six years this is not going to go away,” Dalling said. “We expect amendments—a lot of insider baseball. The utilities, DTE and Consumers Energy, are throwing a ton of money around.” He added that a new natural gas coalition supported by eight firms and armed with a huge war chest has been formed. “We know we are going to be outspent and outgunned,” said Dalling. “We have to get all our propane colleagues onboard and take this issue seriously. It has to become a nationwide fight.”

Jeff Petrash, NPGA vice president and general counsel, reports there are natural gas expansion plans afoot in 30 states. “It’s not so much a situation as one size fits all because the proposals are different,” he said. “What they have in common is that the legislation would allow existing ratepayers to subsidize uneconomic expansions. The fact is, utilities can’t make an economic case for expanding natural gas lines without their anchor customers. Otherwise costs would skyrocket and they wouldn’t be interested anymore.”

Petrash added that population density, the traditional trigger for natural gas utility interest in expanding service to new regions, is not in play. Further, utility investors and oversight agencies would quickly seize on any decision to expand at $1 million a mile, the going rate absent subsidies from existing ratepayers.

Interest in natural gas expansion at the federal and state level is being driven by the growth in resources and stable prices, Petrash observed. “The resource base has grown and prices are low, so let’s hook everybody up seems to be the thinking. But the big issue is the high cost of delivery to sparse populations. Introducing a model where existing ratepayers and government subsidies pay for residential service expansion is seen by state legislators as a solution to the cost barrier.”

NPGA reports that while attention is certainly focused on the Lower 48 states, a major battle is being waged in Alaska over the future of propane. The state legislature has considered bills in the house and senate that would allow the Alaska Industrial Development and Export Authority to issue bonds to finance the purchase of Pentex Alaska Natural Gas Co. LLC and its assets, including Fairbanks Natural Gas, for $52.5 million. The purchase would put the state into the natural gas business, with the intention to expand pipelines into interior Alaska.

The Pacific Propane Gas Association has retained legislative counsel to promote propane’s immediate viability. There is also local support for propane, including an editorial from a University of Alaska professor who underscored how propane could be an excellent alternative for interior Alaskans. Alaska Gov. Bill Walker has run into opposition with some legislative leaders over how to proceed with natural gas pipeline expansion. At stake are tens of billions of dollars of development money, including some taxpayer funds.

At the federal level, Federal Energy Regulatory Commission Chairman Tony Clark Oct. 6 called for more natural gas transmission pipeline infrastructure, citing the shale boom’s transformative effect on the U.S. Speaking at the North American Gas Forum, he emphasized that shale gas and the midstream sector have significantly contributed to lower gas prices. He pointed out that even in a scenario where there was heavy reliance on energy sources such as solar and wind for electrical generation, efficient natural gas plants and infrastructure would remain a major energy source to support the inherently intermittent nature of renewables.       —John Needham          

Greatest Risk Now for Propane Retailers: Supply Complacency

By JD Buss…

 An “outlier” can be defined as a value that “lies outside” most of the other values in a set of data. In 2008, Malcolm Gladwell published the book “Outliers” in an attempt to identify why some individuals have been extremely successful. In a separate question and answer section, he wrote that “we vastly underestimate the extent to which success happens because of things that the individual has nothing to do with.”

Expanding Gladwell’s thought process, success also has a great deal to do with how individuals respond to circumstances they have nothing to do with. Looking at this coming winter, there are several risks propane retailers can’t control, but they can certainly be successful based on how they prepare and respond when those risks show themselves.

The end of May through June saw some of the largest historical price discounts in the propane market. Rumors of product in western Canada moving for below-zero values (producers having to pay buyers to move propane) to large discounts in other regions clearly marked the period as a buyer’s market. Those discounts began to fade in mid-July, but the sweet taste of discount values still lingered in the mouths of most buyers.

For roughly two and a half months, the spot market tightened as speculation built that more producer volume was entering storage. Beginning in October, however, we saw the spot market start to loosen up. Railcars appeared plentiful and primary U.S. storage levels reached the 100-MMbbl mark. Spot prices were coming in well below winter index levels. Even though they didn’t drop to match the low prices of the early summer, it was clear that the market has propane to spare.

Through the ebb and flow of the past few months a great risk lurks for the propane retailer: supply complacency. The buyer’s market has seen record-low prices in early summer along with experiencing at least two periods of decent spot market selling. Both of these can lead to the perception that these conditions will last forever. As we all know, nothing lasts forever, and nothing cures low prices like low prices.

And the end of forever could start in December of this year. For well over a year, there has been great anticipation for the coming export expansions. The current year has seen one minor expansion (de-bottlenecking) at the Enterprise Products facility. Sunoco’s Nederland, Texas export terminal has now been actively moving product since February, with summer volumes peaking at above 4 MMbbl a month. Trafigura’s Corpus Christi facility should be gaining momentum this fall, as well as Occidental’s Ingleside terminal. Even the Ferndale terminal in Washington saw propane exports over the summer months.

At the time of this article, the Energy Information Administration provided export data through the end of July 2015. Total exports for the first seven months of the year stood at 121 MMbbl. That level stands 48% above the seven months for 2014. Utilizing third-party waterborne data, we see the first nine months of the year showing propane exports of 160 MMbbl, 6 MMbbl above the total level for all of 2014. By merely keeping a steady pace through the fourth quarter, annual exports for 2015 will be 43% above all of last year and end above the 200-MMbbl mark.

All of this export growth comes while propane inventory levels are setting record highs, and still leaves open the question of why December could change the export status. One of the most anticipated items this year has been the coming Enterprise export terminal expansion. The buildout includes a new refrigeration train that will pump 11,000 bbl an hour and expand the overall facility capacity up to 16 MMbbl a month. From an incremental standpoint, this would provide anywhere from another 6 to 8 MMbbl a month of export capacity.

For much of the second half of 2015, the expansion’s completion has been scheduled for the fourth quarter, with the rumor mill widely calling for December as the start-up time. The trend in the last three years (2012-2014) shows the fourth quarter with the highest level of exports. The current steady export rate, along with the Enterprise expansion, should continue the trend in 2015.

The market risks with this expansion are twofold, and center on different price trends as well as timeframes. First, the coming growth rate of roughly 7 MMbbl a month would generate another 84 MMbbl of export volume during 2016 and represent another potential 40%-plus growth rate for that year. If production levels of propane merely maintain status quo, the export growth would easily eat up the U.S. storage surplus. The last piece of this scenario involves the expansion of the Panama Canal, which should shorten the travel time to the Far East and further support U.S. export growth. This overall scenario definitely generates a strong, bullish view that could start to quickly drive prices during the heaviest demand period of the U.S. retail market.

The second risk with the export growth is short-term. Between now and mid-December, there remains limited to no overall demand increases that can significantly lower the current storage levels. Crop drying, one of the larger fall propane demand sectors, appears very weak. This second overall scenario implies that prices could be range-bound or even lower as inventory levels balloon further in the coming weeks, giving support to the supply complacency risk mentioned earlier.

Cold temps will be coming! That has been the hope, battle cry, and mantra of retailers for decades. El Niño has been all the rage in weather discussions this year, prompting multiple weather forecasts for warmer winter weather from the Pacific Northwest to parts of the western Great Lakes region. The weather trading market has a similar viewpoint as heating degree day (HDD) swap bids (prices at which traders are willing to buy) have dipped well below historical HDD averages. For much of the summer, the weather market has trended downward, with expectations of lower HDD counts from the Pacific Ocean to the Great Lakes.

Pull up the Farmer’s Almanac for the upcoming winter. The publication is calling for a repeat of last winter. Specifically, the Farmer’s Almanac is forecasting “unseasonably cold conditions over the Atlantic Seaboard, the eastern portion of the Great Lakes, the lower peninsula of Michigan, Ohio, Kentucky, most of the Tennessee-Mississippi Valley, as well as much of the Gulf Coast.” Getting more detailed on the timing side of winter weather, the almanac has highlighted the second week of January and February as “possible heavy winter weather.”

Weather 2020, a firm with technology said to provide 75% forecast accuracy from 1 to 200 days out, has another view on winter weather. According to founder and meteorologist Gary Lezak, “This is likely going to be the strongest El Niño ever recorded. Every year’s pattern is unique. We will have our winter outlook after the pattern sets up in the next few weeks. These other forecasts are based entirely on El Niño or just a pure guess. Every El Niño is different.”

Which weather view is correct? Will El Niño bring warmer temps to a larger region, will the Farmer’s Almanac prediction come true, or will this be a completely different weather cycle than previous El Niño events? Either way, the weather presents two distinct timing risks. Neither a strong El Niño nor a repeat of last winter signals strong weather-related demand for the fourth quarter of this year. Couple that view with rising storage levels, strong available spot volume, and export expansion not slated until December, and overall propane demand could be minimal and result in lower prices through the end of this year.

The second timing risk could prove much more bullish. A repeat of last winter in the January and February periods will coincide with a rapid increase in propane exports, which will generate bullish price actions. In addition, regional supply challenges could exist as propane storage — while plentiful in the Gulf region — still has to be transported to areas of need.

The feeling of security, induced by a summer of burgeoning inventory and low prices, could fade quickly as exports ramp up and winter weather finally makes its mark at the end of 2015 and beginning of 2016. In order to protect a retailer’s physical supply of propane, we’ve been strong advocates of both using storage assets and ensuring contract compliance with your supplier, strategies that the National Propane Gas Association white paper from May 2014 recommended. To mitigate price fluctuations, we recommend being open to purchasing more upside protection for both this winter and future winters during the middle of the 2015 fourth quarter. Our recommendation for managing weather focuses on retailers considering utilization of specific HDD tools (weather hedges) that provide cash flow protection should cold temperatures fail to appear.

Writing this in mid-October, we don’t know all the outlier risks that will pop up this coming winter. Heeding the advice of plan, plan, and re-plan will help propane retailers prepare for multiple risks and fend off succumbing to complacency in the market.

JD Buss is an adviser to independent propane retailers at Twin Feathers Consulting (Overland Park, Kan.). He previously worked in risk management, marketing, and trading at Koch Industries and Enron.