The New Normal: High Volumes in Primary Storage

Inventory Trends reports from the National Propane Gas Association (NPGA), available at npga.org/inventorytrends, confirm that U.S. propane stocks are quickly rising from their March bottom, this despite pressure from exports early in the year. That pressure came after the commissioning of Enterprise Products’ Houston Ship Channel terminal expansion. Nonetheless, propane is now continuing its seasonal rise this summer. Further, mid-July inventory data from the Energy Information Administration (EIA) shows that higher stock levels are indeed the new normal, NPGA asserts.

“The market has gained wisdom over the past several months and realized that greater inventory needs to be held to ensure adequate days of demand as exports grow,” notes the association. “Inventories in mid-July are at levels similar to those seen last year, and again are near record highs for the summer season. Market acceptance of higher inventory being the new normal has manifested itself in propane prices strengthening versus crude.”
Supply Koloroutis

George Koloroutis, chairman of NPGA’s Propane Supply and Logistics Committee, emphasizes that propane days of demand is a critical measurement that all marketers should have in their focus. “In the Inventory Trends report this important indicator forecasts the number of days — at each month’s rate — that primary inventories would satisfy demand. Higher demand requires higher levels of inventory to be held to maintain the days ahead,” he explains.

The ThompsonGas executive vice president and COO outlines that the calculation for the Trends Report is done on a macro level, considers all inputs and outputs, and computes what eventual days of demand are for primary inventories. “And in the new export environment this is something we should all look at monthly,” he says. “But let me also point out the fact that this exercise can also be done at a more micro level. In fact, some propane marketers I know perform this calculation on their own to determine the days of demand they have at each of their storage locations. It can be as simple as adding up loads — trucks or railcars — that you have scheduled to be delivered in a given month and then netting your daily sales — deliveries to customers — against that number. This is smart supply management and it can prompt a marketer to take the correct action — adding or canceling deliveries — before something goes wrong.”

Debnil Chowdhury, director at IHS Markit and manager of the consultancy’s North American natural gas liquids service, adds, “The new normal moving forward — to keep prices in line with historical ratios to crude — will be to hold more inventory to maintain days of supply. If we ever reach inventory levels near the historical norms, prices most likely will be very high during that time period as the market will be tight.” And he underscores that most of the nation’s high propane volumes are in the Gulf Coast, since that is the region where the majority of new export capacity is located. “This is important to note, because even though inventory appears to be high as a whole compared to historical five-year values, most of this is due to PADD 3. A cold winter could lead to a situation where we appear to be well stocked when looking at the U.S. numbers as a whole, but have shortages in the Midwest or Northeast, which would put upward pressure on prices.”

NPGA’s Trends Report comments that while propane exports grew slightly in April, they remained well below the high volumes witnessed during the first two months of the year due to weak arbitrage and maintenance at the Enterprise terminal. Data released in July by the U.S. Department of Commerce shows May exports rising 31.8% over April to reach 27,711,170 bbl, up 6,688,304 bbl month on month. For the year, exports jumped 53.3%, or by 9,637,928 bbl, compared to May 2015. Nevertheless, NPGA reports IHS Markit Waterborne data shows that exports are expected to remain lower over the summer months as arbitrage remains weak, adding that regional arbitrage had closed and seven or more export cargos had been deferred in July. In addition, pressure from lower freight rates due to a well-supplied fleet and the opening of the Panama Canal expansion June 26 have helped keep arbitrage between the U.S. and Japan low. As well, Europe and Japan are reported to be well supplied.

“Moving into the winter months, exports are expected to increase as demand sees its seasonal growth in Asia and the Phillips 66 terminal begins operations in October,” says NPGA. “It is expected that if the pace of production slows, exports will continue — albeit at lower rates than earlier in the year — at the expense of petrochemical cracker demand.”

Phillips 66 is scheduled to bring its Freeport, Texas LPG export terminal online in the second half of this year as part of its Sweeny Hub initiative. The new facility will provide 4.4 MMbbl a month of export capacity, the equivalent of eight very large gas carriers (VLGCs). The terminal is located on the site of a crude oil import marine terminal and utilizes existing Phillips 66 midstream transportation and storage infrastructure. Export terminal infrastructure includes a 550,000-bbl refrigerated propane storage tank, LPG salt dome storage, and four refrigeration trains. There are two LPG-capable loading docks and two loading arms per dock. Two ships can be loaded simultaneously at a rate of up to 36,000 bbl an hour.
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Meanwhile, gas plant production data, courtesy of IHS, shows a reversal for the propane production declines seen in December and January. NPGA reports gas plant propane production is expected to grow in 2016, despite the decline in rig counts. The association explains the contradiction is due to increasing production of NGLs from drilled, but uncompleted, wells (DUCs). However, the production growth rate will be much slower than that witnessed during the shale boom.

IHS expects the bottom for rig counts to be set in the second quarter this year. Thereafter, higher crude prices should provide the incentive for redeployment of wells. “This should help ensure continued propane supply, but may lead to a flattening of production as the DUC inventory declines. This phenomenon, combined with export pressure due to the startup of the Phillips 66 terminal, may lead to lower days of supply than witnessed last year.”

“We expect gas plant production to grow slightly in 2016 versus 2015 — 4.3% in the latest inventory report,” says Chowdhury. “This is a slowdown from the growth we have seen during the shale boom. Refinery production in 2016 is expected to be higher than 2015. Although run-rates are about the same as last year, stronger prices led to less internal burning of propane within refineries starting in March of 2016. We expect this to be the case for the rest of the year unless crude prices fall substantially again, leading to [refinery] power-generation economics favorable to propane and encouraging internal burning.”

NPGA recounts that, with the exception of PADD 5 (the West Coast, Alaska, and Hawaii), all other PADDs exited winter 2015-2016 with healthy propane inventories. PADD 5 should see stocks rise now that PBF Energy’s 155,000-bbld Southern California refinery in Torrance is back online. Koloroutis’ view is that those robust end-of-winter inventories within most PADDs were due to a combination of strong production, stalled exports, and warm weather. He adds, “Marketers are supply-planning better thanks to the educational steps taken by NPGA. If last year was cold, there would have been regional outages and transportation asset shortages — trucks and railcars. But for those that planned accordingly, they would have been in good shape.”

Koloroutis says there were lessons learned from winter 2015-2016. “In my mind it validated the importance of the three following points: Actively manage your supply plan and keep your storage topped off. Things can change fast today. Be prepared. Second, read the Trends Report. Learn to read it, and if you don’t know how to, ask someone on the PS&L (Propane Supply and Logistics) Committee. I am happy to help anyone, by the way. And don’t limit your attention to your PADD or region only. Look at the other PADDs because it will ultimately have an impact on you if another PADD’s inventory levels move down or up dramatically. Third, make sure you have a win/win relationship with our suppliers. You each share the same objective as you each want to sell as much propane as possible.”

On the infrastructure side, Koloroutis observes that many projects have stalled in the new “lower for longer” crude oil price environment. “This has slowed exports as well. I think keeping your eye on crude oil prices, if not daily, then at least weekly, is something that should earn the attention of a marketer. Obviously, low prices slow infrastructure growth and high prices increase infrastructure growth and production. At some point, OPEC will grow weary of keeping prices down, and I can assure you the rest of the world already has. There will be a surge in crude pricing again, but the million-dollar question is: When? I don’t know the answer, but I have a feeling it is not too far away.”

Chowdhury characterizes the biggest stall in propane infrastructure as under-utilization of burgeoning export capacity. “Phillips 66 coming online in October of 2016 will make that problem worse. It appears that we are OK with gas processing capacity and fractionation capacity for the next several years. Over the next two to three years there may need to be some investments in pipeline capacity to allow Marcellus/Utica production to find its way down to the Gulf Coast.”

NPGA’s Trends Report notes that, although not a huge concern in the past, it is important for the global and domestic propane markets to now closely monitor the hurricane season. “As the U.S. has gone from being a small player in the export market to being the largest, the world depends on it for supply. One major hurricane can greatly affect export capacity and have ripple effects on global propane supply and pricing.”

The association, eyeing other weather trends, comments that the latest forecast calls for the likelihood of a La Niña condition to develop this fall, replacing El Niño, but the odds have been dropping. Effects for the two normal weather patterns vary according to the severity of the events. However, generally La Niña conditions favor a more active storm track, above-normal precipitation, and cooler weather over a wide area of the Pacific Northwest. Precipitation anomalies could also extend through the Intermountain West and across sections of the North Plains and into the Great Lakes region. The South could experience something different from the El Niño condition that now exists. Drier and milder weather conditions could extend from the Four Corner states across the South and Central Plains all the way to Florida.

NPGA reports that weather forecasters gain additional accuracy toward the winter months, which may lead to more aggressive propane demand forecasts and tighter markets. “A cold winter could lead to a situation where the overall U.S. market appears to be well supplied on a cursory level, but regional shortages, especially in PADD 2, occur, leading to sharp rises in price differentials,” says the association. “Well, if La Niña happens, which we all hope it does, there could be some regional tightening of propane supply and transportation assets,” Koloroutis adds. “But at this point we are in a wait-and-see position as we move closer to the crop drying peak season and closer to our demand season.”

Northeast
RBN Energy (Houston) wrote in June that the U.S. Northeast now produces all the propane and butane it needs on an annual basis, but because of the seasonal nature of demand in the region, and what it described as “a dearth of in-region storage,” a lot of NGL production needs to be railed to storage elsewhere during the warmer months, then be moved back to meet wintertime needs. “This propane/butane back-and-forth raises costs and reduces producer netbacks. Surely there is a better way,” the consultancy commented.

Citing EIA statistics, RBN Energy observed that NGL production in the wet Marcellus and Utica shale plays has been rising steadily. In 2012, production in PADD 1 from natural gas processing plants averaged less than 50,000 bbld, but by March 2016 it had risen to 321,000 bbld, including 115,000 bbld of ethane, 118,000 bbld of propane, 37,000 bbld of normal butane, 17,000 bbld of isobutene, and 34,000 bbld of pentanes-plus, or natural gasoline. Ohio, part of PADD 2, adds to the regional totals. “The boom in Northeast NGL production has posed a real challenge to producers and midstream companies as demand for propane and butane swing sharply between summer and winter with heating demand for propane and motor gasoline blending demand for normal butane—and there is only a limited amount of NGL storage capacity in the region,” RBN points out.
Supply Mountaineer

Part of the storage solution may come from Denver-based Mountaineer Storage LLC, which has concluded a successful open season for its proposed salt dome storage near Clarington, Ohio. The open season resulted in requests for more than three times the amount of initial planned capacity, sponsors report. The project should break ground in early 2017 with a planned in-service date of early 2018. The Mountaineer project calls for offering up to 2 MMbbl of initial storage capacity with more than 40,000 bbld of load-in and load-out. The facility will store ethane, propane, butane, and Y-grade products for the growing number of gas processors, producers, and commodity traders interested in the burgeoning wet-gas production from the Marcellus and Utica shales.

David Hooker, managing director of Mountaineer NGL Storage, said that scaled development began in late May. “We’ll begin the permitting process for LPG storage, initiating a 3-D seismic shot over the property, drilling a test well, and coring the salt to confirm its suitability for LPG storage,” he said. “We’re pleased to see that the support of this project in the heart of the Marcellus/Utica wet gas shale play is as strong as it is. The Mountaineer NGL Storage project is strategically placed to provide service to the expanding network of pipelines, rail, truck, and barge infrastructure that is currently being built to transport Marcellus and Utica natural gas liquids throughout the Northeast and Mid-Atlantic.”

The planned facility is located along the Ohio River and will utilize the Salina salt formation in the Ohio River Valley. The formation is about 6300 to 6700 feet below the surface and has been used for NGL storage in other parts of the U.S. The project will be constructed in phases and it is anticipated there will be multiple caverns. The project initially is expected to have truck and rail facilities, with future design capabilities for pipeline and river barge transportation.

RBN Energy says it is likely the best use of additional NGL storage in the Northeast would be for propane and butane. Ethane, although also lacking adequate storage, can still be cleared through rejection into the natural gas stream when there is surplus for cracker demand. It can also be transported out of the region on the Mariner East pipeline to the Marcus Hook, Pa. export terminal, on the Mariner West pipeline to the Sarnia petrochemical complex, or on the ATEX Pipeline to Mont Belvieu.

During any given year, propane demand in the region can swing from 100,000 bbld during the spring and summer months to nearly 400,000 bbld or higher during cold winter months, notes RBN. More than 80% of the propane demand in PADD 1 comes from the residential and commercial sectors. “If EIA did track rail and truck movements for propane between PADDs, you would see significant volumes of propane leaving PADD 1 during the spring and summer months due to lack of storage capacity and insufficient demand. Most of those rail movements have been via relatively expensive manifest or partial trainload shipments,” RBN reports, adding that at least one unit train was scheduled in March.

But if more storage was available locally, product wouldn’t necessarily have to leave the region at all. As well, after the Mariner East 2 pipeline expansion to Marcus Hook comes online, “more propane will be able to move directly from Marcellus/Utica producers to international customers. That is planned for mid-2017, though we keep hearing about the possibility of more delays.”

RBN concludes that “while the Northeast has become a hydrocarbon-production powerhouse, the economic benefits of that triumph are being watered down by the need to shuttle large volumes of propane and butane out of the region, and back in, rather than storing it close to where it is produced and close to where it will ultimately be consumed. The Mountaineer NGL Storage project seems to offer at least a partial fix. But at current levels of production, and with future growth possible, even more NGL storage capacity in the region is warranted.”

Panama Canal
EIA observes that June 26 marked the day the Panama Canal Authority opened a third set of locks that allow the transit of larger ships, the first such expansion since the canal was completed in 1914. However, because of the economics of shipping, trade patterns, and the types of ships used to transport crude and petroleum products, the latest expansion is expected to have limited effects on most petroleum markets.
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However, it is recognized that the new canal expansion could be expected to improve the logistics of U.S. propane exports. Previously the canal’s size restrictions required ship-to-ship transfers, which created bottlenecks for U.S. exports to Asian markets. The new, larger Panama locks will allow a majority of VLGCs, the type of ship that carries most propane and other hydrocarbon gas liquids, to transit, likely reducing or perhaps eliminating the need for ship-to-ship transfers.

EIA comments that U.S. propane exports have increased significantly over the past three years, but only after market participants overcame several challenges in transporting propane to their customers. After largely overcoming the first challenge — building sufficient export capacity — the next challenge involves economically transporting large volumes of propane over long distances. The recent, although likely temporary, solution has resulted in import and export data abnormalities affecting U.S. propane exports to Asian countries.

Asia, the largest regional destination for U.S. propane, imported 220,000 bbld of U.S. propane in 2015, or slightly more than one-third of the total U.S. propane exports. Most of those exports originated from the Gulf Coast and traveled through the Panama Canal or on long, more expensive routes that go across the Atlantic Ocean and then through the Suez Canal, or around Africa’s southern tip to destinations in Asia.

Transporting large quantities of propane over long distances requires specifically designed refrigerated ships. The largest, most economical class of these ships are VLGCs. Only a limited number of VLGCs with narrower, more upright hull designs were able to pass through the original Panama Canal lock dimensions. This changed when the new larger set of locks opened.

One method used to cut voyage times and costs within the constraints imposed by the old canal involved a ship-to-ship transfer, where the propane cargo of a larger vessel was transferred to a smaller ship that could transit. Once through the canal, the small ship would either continue on to Asia or transfer the cargo back to a larger vessel. The additional cost associated with using multiple ships was mitigated by cost and time savings from transiting the canal rather than taking longer, alternative routes that avoided the canal.

EIA reports this cargo transfer activity likely affected trade data. Much of the agency’s energy export data is based on information from the U.S. Customs and Border Patrol, which collects the final destination of an export, if known. Despite this requirement, some of the propane cargos exported from the U.S. that underwent a ship-to-ship transfer cited the jurisdiction of the transfer, not the cargo’s actual final destination. U.S. export data showed increased propane exports to countries in the Caribbean and Central America where the ship-to-ship transfers were taking place, but these countries do not have sufficient demand for, nor the infrastructure to store and distribute, such large quantities of propane.

For example, based on trade data, the U.S. exported 31,000 bbld of propane to Panama in 2014 and 23,000 bbld in 2015. However, the National Energy Secretariat of Panama reports total national propane consumption of only 1671 bbld in 2014 and 1736 bbld in 2015. Similarly, Aruba, an island nation of about 100,000 people with no major source of demand such as a petrochemical facility or propane-fired power plant, reported 23,000 bbld of propane imported from the U.S. in 2015.

This discrepancy, EIA maintains, affected import data in Asian countries. Both China and Japan have begun to report propane imports from Panama, even though Panama does not produce any propane. Therefore, these propane volumes were likely U.S.-sourced propane that underwent ship-to-ship transfers in Panamanian waters. But not all cargos that underwent ship-to-ship transfers were necessarily destined for Asia. The ports and territorial waters of Central American and Caribbean countries were also likely locations for large cargos of propane to break-bulk, where large cargos are divided into several smaller ones to better accommodate regional demand.

The new, larger Panama Canal locks allow the majority of the world’s VLGC fleet to transit, which will likely reduce or end the practice of ship-to-ship transfers of U.S. propane designed for Asian markets. That outcome will reduce discrepancies between import and export statistics, providing greater clarity on the major markets for increasing U.S. propane exports.

Lower-Cost Drilling
Upstream, in what may be a boon in the longer term to rig counts, research indicates there is significant upside potential for U.S. oil and gas operators to apply lower-cost unconventional drilling and completion technologies to boost production from tight conventional reservoirs. The analysis by IHS Markit is based on the assessment of nearly 46,000 U.S. horizontal wells completed between 2010 and 2015. It studies how unconventional drilling and completion technologies could be applied to the redevelopment of conventional wells in the top 39 established U.S. tight conventional plays where the major shale plays are also being developed.

The key plays identified that have the potential to better leverage horizontal technologies include the Rocky Mountain region’s Williston, Powder River, and Denver basins; the Permian Basin and Eagle Ford play in Texas; and the Mid-Continent region, including the Anadarko Basin. According to IHS Markit, the average global recovery factor for a conventional oil reservoir is 34%, with two-thirds of the oil still left behind in the ground. Many tight conventional oil reservoirs, however, demonstrate recovery factors of only 15% or less, which is substantially lower than the average recovery factor for conventional reservoirs.

“Our research indicates that there are significant potential benefits of applying some of the same drilling and completion techniques that have been used so successfully in the U.S. shale oil plays to increase recovery in these tight, U.S. conventional plays,” says Steve Trammel, director of North America well and production content at IHS Markit Energy. “We identified tight conventional plays that were tested with horizontal wells during the last five years, and in our study, which analyzed nearly 46,000 U.S. horizontal wells completed between 2010 and 2015, average initial potential (IP) test rates for the leading tight conventional plays compare favorably with the IPs of established shale oil plays. However, of the horizontal wells we analyzed, just 10% of the horizontal wells drilled were in tight U.S. conventional plays, so there is considerable potential here for operators.”

Trammel adds that leveraging these technologies is attractive to operators because the overall break-even costs to develop these projects are much lower and delivery infrastructure is already in place. “These tight conventional resources are in reservoirs with older vertical wells that can be reentered by horizontal drilling. The rock properties do not require the size and cost of a hydraulic frack job needed for an unconventional zone, and therefore these are much more economic for operators in the current low-oil-price environment.”

He explains that leveraging horizontal wells to further test tight conventional plays in these areas has led to the establishment of stacked plays with huge resource potential. “The plays in the Rocky Mountain region, in particular, have the majority of the highest-ranking tight conventional plays of those we studied in our IHS Markit Energy report, but tight conventional plays in Texas, including the Permian Basin and the Eagle Ford Fairway, also fared well in terms of potential for redevelopment.”

And the analysis includes an unexpected bonus for operators. “Our analysis identified 25 tight conventional sleeper plays that have been tested with only a few horizontal wells, but have average IP rates greater than 200 barrels of oil equivalent per day,” Trammel says. “In addition, shallow conventional plays may also offer opportunities for operators to leverage these unconventional technologies in the current oil price environment.”
    —John Needham

Managers and Leaders…

By Tamera Kovacs… The retail propane industry was largely built by entrepreneurs who believed they could create something of value by doing things just a little differently and better than everyone else. Most had a vision for the business they wanted to create. It may have been a scratch start-up or it may have been added on to an existing business. It was one person’s ability to see the opportunity coupled with the leadership traits to make that vision a reality.
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These entrepreneurs, or business owners, have the ability to paint the vision of the future of their company for everyone to see. The best of them also realize they can’t do it alone. Business owners, like all individuals, have their strengths and weaknesses and they realize they need to find leaders and managers to help them. They realize people are the critical element to success.

The heart and soul of a company is directly tied to its people. For a retail propane operation, the staff, management, and leadership are critical to the success of the company as the product (propane) is the same for all propane companies. Hiring well increases a leader’s and manager’s ability to leverage their time and responsibilities by delegating. It is the way the staff is empowered to handle customers’ concerns that differentiates one company from another.

It is often believed managers and leaders are interchangeable. While some individuals have the ability to do both, most people tend to gravitate to one set of talents or the other. Leaders tend to be focused on the company’s vision. They assume the responsibility to challenge and inspire the staff and communicate the status and progress of the company. Leaders think in terms of one to five years out whereas managers have a shorter time horizon.

It is the manager’s responsibility to develop and execute the strategies and tactics needed to achieve the vision. They are charged with the day-to-day implementation of processes and procedures as well as developing and motivating the employees. Managers also have the delicate task of balancing business operations, taking care of the customer, and tracking numbers. Everyone in the organization needs to have good understanding of their numbers and their impact on the overall performance of the business. What is the profitability of your business today compared to the past three years and your projections? It’s surprising how many retail propane managers or owners when asked about their gross margin state the margins they receive on their residential business, not the total weighted propane gross margin. If business owners or managers make decisions based solely on their residential margins (unless they are a 100% residential business), they may be hindering their total profitability. How are capital investments actually impacting the operations and financial performance of the business? How much will it cost to deliver to that new customer? Are you charging enough? How are customers responding to the different marketing campaigns implemented?

Companies over time change and evolve and their leadership and managerial needs also shift. In small companies one individual may be able to perform both leader and manager roles. However, as the company grows it becomes increasingly difficult to be proficient at both. Owners and leaders are constantly in search of the magic formula of balancing leadership and management for ultimate success. Many owners of propane businesses have made the comment, “I spend all my time addressing the daily concerns and issues of the business and I have no time left at the end of the day to focus on the direction and vision of the company.”

Matching a manager’s management style and strengths to the company’s goals, culture, and needs is critical. A manager that is successful in one organization may not be the right fit for your organization. It is commonly said, people don’t leave companies; they leave managers. Conversely, excellent managers tend to have good employees follow them. The manager that meets your company’s needs today may not be the right person in five years. It’s a good business practice as part of your annual review process to assess your management staff. When evaluating, treat the management position as a new position. Take the time to define the position and create a profile. Develop a list of duties and responsibilities and establish expectations and compensation for the ideal candidate. You should have a good understanding of the manager’s values and how they will implement the strategies and tactics. Are they aligned with yours? After these steps are completed, assess your current manager to determine areas for additional development, training, or education.

When it comes to leading and managing a company, there is no right way or wrong way. Each and every company, owner, entrepreneur, leader, manager, and employee will have their own views. The magic is finding the right blend of complementing the talents necessary to achieve the desired goals.

Tamera Kovacs is a financial and business consultant for Propane Resources, a company providing financial and operational consulting, merger and acquisition services, supply, transportation, and marketing communications services for the propane industry. She can be reached at (913) 262-0196.

Industry Fights for ‘Zero Net Energy’ Regulations in California

As residential builders in California move toward meeting state energy efficiency standards that will eventually require residential buildings to produce as much energy as they consume, the Western Propane Gas Association (WPGA) is emphasizing the role that propane can play in meeting the goal known as “zero net energy.”
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Zero Net Energy (ZNE) is a term meaning that a building structure generates as much energy as it consumes, measured over a one-year period. More specifically, according to the U.S. Department of Energy, a zero net energy building “produces enough renewable energy to meet its own annual energy consumption requirements, thereby reducing the use of non-renewable energy in the building sector.” The California Energy Commission (CEC), through Title 24 of the California Code of Regulations, has set a goal for all new residential construction in the state to be zero net energy by 2020, for a 17% improvement toward ZNE for existing residential homes, and for all new commercial construction to be zero net energy by 2030.

Alex Gallard, in-house counsel for Blue Star Gas (Santa Rosa, Calif.), researched and obtained knowledge on zero net energy policies for WPGA to assist in developing its strategy. Gallard told BPN that the zero net energy goal encourages the use of renewable energy such as solar. How does a building generate energy? “Simple: It’s all about solar,” said Jeff Stewart, president of Blue Star Gas. He explained that Title 24 is part of California’s SB 350, which mandates that the state must generate half of its electricity from renewable sources such as solar and wind by 2030.

To measure a building’s ZNE compliance, CEC uses a measurement it calls the time-dependent value (TDV) of energy, which assigns a value to different energies based on type of utility, location, time of day, and by the type of construction, to show the cost to consumers and the utility system. CEC uses TDV as the basis for setting maximum energy budgets for buildings and valuing the energy performance tradeoffs made in building designs, according to WPGA.

Gallard mentioned news from earlier this year that a bipartisan group of 17 governors signed the Governors’ Accord for a New Energy Future, a joint commitment to take action to promote clean energy, clean transportation choices, a modern electrical grid, and plan for a new energy future. “It’s a common trend for states to update their building codes to make them more efficient,” Gallard noted.  

He emphasized that the propane industry should focus on how propane will fit into this new world of energy efficiency. He believes that the promotion of propane heating appliances will be a crucial step in getting propane recognized as a product that can help homes move toward meeting the zero net energy goal. A joint working group of WPGA and the National Propane Gas Association (NPGA) is developing a broader strategy for how propane marketers may preserve gallons in states where ZNE strategies will be deployed.

“If you can show propane is not an exorbitant energy source from a budget perspective, and that it’s also an efficient source, then the likelihood of utilizing solar panels becomes less,” Gallard explained.

The Propane Education & Research Council (PERC) is also involved in the project with WPGA and NPGA in several ways: The council is helping set the strategy to combat the anti-carbon sentiment in ZNE by showing how propane equipment can meet the goals of ZNE in protecting the environment and providing a workable solution economically. It is also helping provide the data useful to NPGA and WPGA to support the strategy and is “continuing to develop equipment and systems that support the industry as we elevate the conversation on ZNE,” said Tucker Perkins, PERC’s chief business development officer. PERC is also providing photographs and case studies to marketers that help them position propane with builders and homeowners with talking points specific to ZNE.

Stewart is a strong believer in PERC’s product commercialization efforts. He noted that PERC has invested substantial resources in combined heat and power units from Yanmar and other companies. The units use a heat exchanger to increase efficiencies and are an example of a product that can help meet zero net energy requirements. “It doesn’t necessarily have to be solar,” Stewart stressed.

Stewart and a group from WPGA met with the CEC on June 1 to explain the limitations of CEC’s TDV calculations, including the fact that the CEC used EIA’s Annual Energy Outlook data, but did not collect PADD 5 data and did not collect data for summer propane pricing. The group also argued that the TDV modeling results for propane price forecasts that CEC proposed are much too high in comparison with WPGA member data. WPGA provided additional data to CEC in hopes to better address errors in the forecast.

What else do propane marketers need to know about zero net energy regulations? “That it’s here, and here to stay,” Gallard stated. “We’re in an ever-changing energy environment where people are looking to conserve and be more efficient. We need to fill that niche, too.”     —Daryl Lubinsky

Assessment Rate Increase To Help Fund Consumer Ed

To help fund its new consumer education program, along with its Partnership With States program and commercialization projects, the Propane Education & Research Council (PERC) at its meeting July 12 and 13 in Napa, Calif. approved an assessment rate increase from 0.4 cents/gal. to 0.45 cents. The increase is part of PERC’s 2017 budget.
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Council president and CEO Roy Willis said the Nov. 1, 2016 effective date for the new rate will allow the council to collect the assessment during a typically high-demand season rather than wait until the beginning of 2017. Willis stressed that the council was “deliberate” in only keeping “must-haves” in the budget, rather than approve an assessment rate higher than 0.45 cents/gal. The additional revenue is projected to be about $3 million for programs in 2017.

Funding the new consumer education campaign, with a dog named “Blue” as “spokesperson,” was the main reason for the assessment increase. Because PERC just launched the campaign in late June, Willis noted the council has “precious few measures” so far about how well this campaign is achieving its objectives to improve consumer favorability toward propane and increase consumers’ willingness to switch to propane appliances in the home. In the fall, the council will conduct a survey of about 2000 homeowners in rural territories to measure their familiarity and favorability of propane and their willingness to switch. PERC conducted a pre-campaign survey in February.
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“Until we see how the campaign is impacting consumers, we’re essentially planning a steady-state budget for the campaign in 2017,” Willis said, adding that PERC could increase the budget for the campaign if it sees favorable results from the consumer research. “Then we have the option to come back and provide our plans and budget for the campaign. But right now, we’re taking what I think is a very sensible, prudent approach to the campaign.” PERC is also focusing on other major programs that need funding, including its Partnership With States program, safety and training initiatives, commercialization strategies, and research and development.  “All of those are integral parts of our overall budget,” Willis stated. “The [consumer education] campaign is a fairly new addition after six years of restriction without any advertising campaign whatsoever.”

The 2017 budget includes $1.5 million for the Partnership With States program, in which PERC matches state rebate funds for various state propane gas association programs. PERC funding for the program was $1.8 million for 2016. The council will examine the types of activities that will continue under the Partnership With States program.

“I think there are eight or nine programs, the principal one being the appliance rebate program, which I’m a real fan of,” Willis noted.

Also at its Napa meeting, the council approved the formation of an industry outreach committee to review the Partnership With States program.

Council chair Tom Van Buren noted during the meeting that council members in earlier budget discussions mentioned the need for dialog between PERC and the states “to optimize our resources and relationships.” That led to the formation of the new committee. Bob Barry of Bergquist will serve as committee chair, and Randy Doyle of Blossman Gas will serve as vice chair. State propane gas association executives Steve Ahrens in Missouri, John Jessup in North Carolina, and Derek Dalling in Michigan, as well as Pat Hyland, Tucker Perkins, and Kristen Rice at PERC, and former PERC chair Paula Wilson will also serve on the committee, which will work with the council, its advisory committee, and other state propane gas association executives to optimize the rebate program, Partnership With States, and other programs. 

Van Buren also noted that the council has discussed overall strategy now that the new consumer education program is in place. In 2015, the council developed the following list of goals: To enhance consumer awareness; to grow gallons; to promote safety and training; and to engage the industry in enhancing consumer awareness.

“They are fantastic aspirational strategic goals; however, we all realized over the last year we need to be more specific by category, having a top two or three, if you will, and spending time on product development and strategic discussions,” Van Buren said. Drew Combs, PERC vice chair, will chair a new task force to focus on those goals.

The partnership between PERC and the National Propane Gas Association (NPGA) was also a focus of the Napa meeting. NPGA chairman-elect Jerry Brick addressed the council, noting that the PERC/NPGA partnership is strong. “It will get even stronger as we work together on a few key programs underway now,” he predicted, adding that the partnership is successful because of the personal involvement of the officers of both organizations. He noted that integration between NPGA, PERC, and 37 state and regional associations is the central focus of the term of current NPGA chair Stuart Weidie.

Brick noted that working against natural gas expansion into rural propane territory is a main benefit of that integration. Preventing taxpayer-subsidized geothermal installations is another. Integration between PERC and NPGA is necessary to conduct what Brick described as “critical research to demonstrate the value of our product and the economic folly of some of our competitors. That’s where we see the strongest bond between the role of NPGA and PERC.” Results would be less impressive, Brick added, if not for NPGA’s advocacy work combined with PERC’s ability to produce rapid-response credible analytics, and the state associations’ ability to engage at the state level.

NPGA president and CEO Rick Roldan provided another example of the benefits of the partnership. The U.S. Department of Transportation recently published a final rule on bobtail requalification (see p. 10), extending the interval from five to 10 years. The extension might have saved the propane industry $15 million and would not have happened without PERC research. “That’s what the partnership is all about,” Roldan noted.

Consumer Education Campaign
In other news at the meeting, PERC chief marketing officer Dennis Vegas provided an update on the new consumer education campaign, noting that the consumer website, www.proudlypropane.com, launched June 27. He noted that parts of the campaign featuring Blue the dog have appeared on national cable channels such as Animal Planet, CMT, Nat Geo Wild, HGTV, and DIY. The DIY promotion includes messages with a voiceover stating “Brought to you by Proudly Propane” at the end.
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Vegas pointed out that the campaign can’t be successful without propane marketer engagement, and the council has already begun promoting the campaign at state association and industry meetings.

Market Challenges, Opportunities
Mike Sloan of ICF International gave a presentation at the meeting titled, “Propane Market Challenges and Opportunities in 2017: Setting Expectations for PERC Programs Driving Consumer Propane Demand.”

Looking at current market conditions, he mentioned three areas that affect the propane market and the PERC budget in 2017. The first is that the current low propane price environment is creating significant growth opportunity for the industry, particularly in markets where propane is competing against electricity. “The market right now is more favorable in that aspect than it has been in many years,” Sloan reported. “So the timing is really right for a concerted push into consumer markets, residential and commercial markets where propane is competing against electricity.” Electricity prices have been stable while propane prices are down.

But the greatest growth opportunities for the propane industry at the moment are in the engine fuel market, although changes in the energy market have made it a bit more challenging than it was two to three years ago. Diesel fuel prices and gasoline prices have fallen as much or more than propane prices have, Sloan noted, so the decline in autogas fuel prices hasn’t provided an incentive to switch to autogas. Lower fleet fuel costs overall mean less incentive for fleets to consider propane as a way to reduce budgets. “The current market environment means that the industry is going to have to work a little harder to continue to grow and penetrate that market over time.” On the broad propane supply side, a continuing relatively slow shift is occurring away from a market in which supply growth in the U.S. has exceeded the infrastructure to consume propane or export propane. Sloan added that when new facilities come online and international markets continue to develop over time, the U.S. propane supply market will be more fully integrated with the international market.

“I view that as likely to lead to a little bit of an increase in propane prices as international growth picks up and as we become fully integrated with the international market and also subject to a little bit more volatility,” Sloan predicted, adding that exports have not picked up as quickly as he anticipated six months earlier. “If we look ahead two to three years, propane prices will be not quite as favorable for growing the market as they are today. And that’s something to think about and consider in developing the PERC budget.”
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ICF sees continued improvement in the housing market, and that’s projected to continue over the next couple of years before it levels off. Sloan is seeing a bit less conversion from fueloil to propane because of low fueloil prices, and he is also noticing a negative impact from the polar vortex winter of 2013-2014. The polar vortex didn’t have much of an impact on propane market share in 2014, but it did in 2015. “There’s about a year lag between the effect of what’s happening in the market and new propane construction. And that’s important when you’re thinking about the impact of the consumer education program.” He noted that PERC programs funded by the proposed 2017 budget are expected to lead to 120 million gallons in incremental propane sales in 2017.

Council Approves Engine Projects
The council approved $515,000 for an “Off-Road Engine Development Stimulation Project” that will support the development of one to five engines greater than 175 hp.  PERC chief business development officer Tucker Perkins said no specific contractor has been chosen. The product would be used primarily for agricultural engines, but the project is not limited to that sector.

The propane industry’s engine portfolio includes a good representation of lower-horsepower engines, and its selection of middle-horsepower products has been improving.

“But people want to pump more water and want to pump it using higher-horsepower equipment,” Perkins said. “People are looking for higher horsepower applications, and this addresses that. It wouldn’t be limited to just irrigation—we may design a big rock crusher, for example.” He added that PERC will allocate some money to a potential project and then release the rest of the money after the manufacturer demonstrates it can sell a certain number of the engines. “I love that model because it brings to us focused organizations that know they’re going to sell.”

The council also approved a $1-million project with Cummins to develop an engine “optimized for high-efficiency propane operation suitable for application in the evolving medium-duty truck landscape.” The $1 million is the first payment on a total project cost of $12 million, with PERC and Cummins paying $6 million apiece. Perkins described the project as development of “an engine that doesn’t exist today,” which would have the same operating characteristics of today’s diesel engine in the area of fuel efficiency and emissions standards.

The Cummins project would be an engine for propane bobtails and other Class 7 trucks. Perkins hopes the technology would become “scalable,” to be used with smaller and much larger engines, such as Class 8 road tractors.

“I don’t want to minimize the importance of this,” Perkins stressed. “We see a well-respected manufacturer, Cummins, for the first time expressing significant interest in the propane industry. But maybe even more important than that, you see us moving forward to develop technology that really doesn’t exist today and that would give us a product that doesn’t have any equal for fuel efficiency, reduced emissions, and engine durability.”            —Daryl Lubinsky

MFA Oil Expands Operations in Arkansas and Oklahoma

COLUMBIA, MO (August 4, 2016) – MFA Oil Company has acquired select assets of Fuels & Supplies and Jim Woods Marketing, Inc. The sale includes propane operations in northeast Oklahoma and refined fuel/ tank wagon operations in northwest Arkansas and northeast Oklahoma.
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The purchase represents a major step into refined fuel operations for MFA Oil in the state of Oklahoma. This is the company’s third propane acquisition in Oklahoma in 2016. MFA Oil previously acquired Terry’s Propane Inc. of Washington, Oklahoma in May and R&S Propane, Inc. of Dibble, Oklahoma in January.

“This is a great opportunity to expand our distribution network and increase efficiencies in Arkansas and Oklahoma,” says Don Smith, MFA Oil Director of Mergers and Acquisitions. “Fuels & Supplies and Jim Woods Marketing have an outstanding reputation in this region and we are eager to build upon their success.  We plan to run their business with little noticeable change, and with the same commitment to service, quality and small town values.”

The former owners of Fuels & Supplies and Jim Woods Marketing plan to shift their focus to their retail and wholesale fuel hauling business.

“Fuels & Supplies and Jim Woods Marketing have been privileged to serve our customers for 60 years” remarked Alan Chapman, president of Fuels & Supplies and Jim Woods.  “We are excited about this transition to MFA Oil.  Their management has set the tone from the top, reflecting a corporate culture of integrity which will continue to serve our customers.  As a result, all of Fuels & Supplies and Jim Woods Marketing can be assured that quality service will continue as we move forward with our future business plans.”

This is MFA Oil’s seventh acquisition of its fiscal year, which began September 1, 2015. Previous acquisitions include Lybarger Oil, Inc. in Garnett, Kan.; Elaine Petroleum Distribution, Inc. in Elaine, Ark.; R&S Propane, Inc.; S&S Oil and Propane Company Inc. in Emporia, Kan.; Brownfield Oil Company in Moberly, Mo.; and Terry’s Propane Inc.

MFA Oil states it will continue to evaluate strategic acquisition opportunities in its existing market area and other states where it can expand its footprint.

About MFA Oil Company:
MFA Oil Company, formed in 1929, is a farmer-owned cooperative with more than 40,000 members. MFA Oil is the seventh largest propane retailer in the United States. The company supplies fuels, lubricants and propane to customers in Missouri, Arkansas, Colorado, Georgia, Indiana, Iowa, Kansas, Kentucky, Nebraska, Oklahoma, Tennessee, Utah and Wyoming. Through a subsidiary, MFA Oil operates Break Time convenience stores in Missouri and Arkansas, Jiffy Lube franchises in central Missouri and Big O Tires franchises in Arkansas, Missouri and Oklahoma.