Never Again: Times Have Changed; Business Planning Begins Now

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Propane Days participants this year had many thoughts to share about last winter’s snarled transportation and supply scenario. Presented for their consideration was a white paper with suggestions for marketers on supply planning. Marketers were encouraged to evaluate its recommendations as a resource when preparing for the upcoming winter heating season. The paper was approved by the National Propane Gas Association (NPGA) board of directors in early June.

The propane industry is advancing “no-repeat” strategies for marketers — backed by consumer education — to avoid doubling down on last winter’s multi-prong logistics, supply, and price-spike nightmare. While recognizing that a replay of the unique alignment of events that caused the unprecedented heating season woes is unlikely, NPGA has published recommendations from the Industry/Marketer Education Working Group-NPGA Supply and Infrastructure Task Force. The suggested guidance targets future actions to avert a rerun. The report may be downloaded at npga.org.Image2

At the same time, at press time the Propane Education & Research Council (PERC) was seeking funding for a multimillion-dollar consumer safety preparedness campaign. The initiative is designed to keep residential propane customers safe by encouraging them to speak with their propane providers to prepare a plan for winter. Winter 2013-2014 revealed a need for more careful planning for cold weather by many residential propane customers, notes PERC. The council adds that will-call consumers were especially vulnerable to supply and price pressures, making planning before cold weather arrives paramount.

The initiatives are being launched before a backdrop of momentous shifts in the U.S. energy landscape, industry leaders comment, changes that see the nation transitioning from an era of declining domestic resource development and production to a promise of returned abundance — thanks to the shale-gas and tight-oil revolution. As a result, ramped-up hydrocarbon production, and the accompanying jump in NGL volumes, means those liquids, primarily propane, are finding international markets via exports. The unfolding supply-sided market provides both opportunities and challenges for U.S. marketers, observes NPGA.  

Regarding the NPGA recommendations, the Industry/Marketer Education Working Group emphasizes there are no “one size fits all” solutions to last winter’s problems. Further, all propane supply planning “must be customized to each marketer’s region, sources of supply, and customer base, in addition to numerous other factors.” Nonetheless, the working group has organized marketer recommendations into subject areas: demand forecasting, supply contracting, transportation and logistics, primary storage, marketer plant storage, customer storage, capital funding/cash flow management, and shale gas issues.

Generally, NPGA defines demand forecasting as projecting requirements for the coming year by considering past gallon sales and reviewing future weather predictions. Supply contracting requirements include evaluating the strength and reliability of the mid-stream supplier — pipelines, rail terminals, storage facilities, and gas plants. Transportation and logistics involves the ability to successfully access, and transport, previously procured product.

Primary storage, the report adds, applies to leasing or subleasing storage in underground salt domes or caverns, which serve as the main repositories for propane in the U.S. Marketer plant storage regards having adequate peak-season needs owned or controlled by individual companies. Inadequate propane stockpiles, on the part of a few, the study states, are associated with the business practices of a few, and are a cause of problems throughout the supply chain. “(Supply) problems caused to all are associated with the business practices of a few,” reports the Industry/Marketer Education Working Group.

As mentioned, customer storage was addressed. Known as tertiary storage, it is a far-reaching part of the nation’s supply equation. The sheer volume, at an industry estimate of 111 MMbbl, or about 4.7 Bgal., in the field in 2011, nearly equaled the amount of primary storage capacity in the U.S. The study concluded that the average tank size for domestic customers was 400 gal. Furthermore, making the assumption that the average domestic propane tank in the U.S. is 250 gal., retailers responding to a PERC survey reported 88 MMgal. of plant storage, but nearly 800 MMgal. of customer storage. This means that tertiary storage is nearly nine times greater than reported marketer plant storage.Image3

“This sheer volume of customer storage in the field underscores the importance of filling customer storage prior to peak-season demand,” the report highlights. “The Working Group urges all marketers to implement programs aimed at ensuring customers are full prior to peak season. Areas of focus should include: eliminating will call accounts; creating budget, pre-pay, or metered programs to eliminate credit concerns; offering promotional pre-season fill rates; and including customers on scheduled delivery routes.”

Therefore, “customer storage is a critical link in the overall supply process. All marketers are urged to evaluate customer accounts to ensure that they are appropriately sized, and to implement policies that encourage route filling and off-season filling,” the NPGA task force says. Underscored is that, “while there are challenges to modifying established practices and consumer behavior, one great benefit of succeeding with these changes is that they have the effect of increasing supply capacity with no additional capital investment on the part of the marketer or the industry as a whole.”Image4

In addition, the NPGA marketer recommendations acknowledge that capital funding/cash-flow management tests the limits of many marketers every year. “With emergency supply costing up to $3 to $5 per gallon, a marketer could be faced with $30,000 to $50,000 for each transport load,” notes the association. “A mere 10 loads could result in an immediate payable of $500,000, with retail customers typically taking 30 to 60 days to pay after receiving each delivery. This cash flow imbalance meant small marketers may have been faced with over one million dollars of negative cash flow in a peak season, if they sold just several hundred thousand gallons.”

The recommendation: communicate often and share corporate financial information with capital providers; use information provided by NPGA, and other groups, to explain seasonal supply situations and how it has affected business; demonstrate that the business is creating, or has created, a supply plan that ensures the negative consequences of any future supply shortages can be reduced; explore increasing credit limits based on demonstrated needs and capabilities; and seek secondary sources of capital, such as other banking relationships, that can be called upon, as needed.

Image5Finally, shale gas issues: NPGA says this, “shale-gas hydraulic fracturing production is transforming the United States from a net importer of propane to the world’s largest propane producer and, thus, a net exporter.” Succinctly, more propane is being produced in the U.S. than can be consumed here at home. “The shale revolution creates both opportunities and challenges for the propane marketer in regard to supply planning,” the association advises. “First, especially for those marketers located in proximity to shale production, shale gas creates an opportunity to purchase propane in the regional market, often at attractive prices.”

However, the problem for marketers is two-fold: “First, shale production is taking over assets: transports, railcars, and pipelines traditionally used by the retail propane industry to move product during supply shortages. Therefore, as an industry we have lost flexibility to move propane to areas of need quickly. Second, shale production, primarily because it is attractively priced versus traditional supply, can lure the marketer away from engaging in, and then performing on, traditional supply contracts.” This can have a negative impact on building winter allocation levels.Image6

NPGA cautions that when considering purchasing propane produced from shale gas, marketers need to be aware that shale production is “steady-state,” in other words, it doesn’t ramp up or down based on seasonal demand. “In fact,” asserts NPGA, “cold weather often reduces the ability for shale gas plants to make propane due to production constraints. Shale production can also be unreliable, and generally has little, or no, storage attached to it. When the plant is running, there is propane. When the plant shuts down, there is none. When purchasing propane associated with shale gas, marketers need to ask themselves the following: What are the economic benefits of purchasing local production? Can a portion of these savings be used to procure secondary/emergency supply? How am I affecting my traditional supply contracts by replacing volume with sale production? What will I do if the local production goes offline, especially during peak periods? Shale gas is here to stay. Marketers should embrace the opportunities, but be mindful of seasonal pitfalls, and the larger strategic issues, posed by it,” maintains NPGA.