This winter’s supply structure will likely
be “stressed but sufficient,” but what
about the winter after that?
Unless the propane industry sees a heavy grain drying load again and another colder-than-normal winter, the propane supply situation should be OK this coming winter of 2014-2015. Mike Sloan of ICF International (Fairfax, Va.) says the propane supply structure is likely to be “stressed but sufficient.” But the following winter of 2015-2016 might be an area of concern as propane export capacity is expected to increase faster than propane production in both 2015 and 2016.
Sloan, in a presentation titled, “2015 Propane Market Outlook—Impact of Changing Propane Supply on Propane Markets,” given on July 17 at the Propane Education & Research Council (PERC) meeting in Santa Fe, N.M., noted that limited options existed in the past for the propane that was produced in North America. When production during the summer exceeded demand, propane marketers could reasonably expect propane to be placed in storage during the offseason and to be available for purchase during the peak winter season when demand exceeded production.
“However, with the growing export market, that’s no longer automatic,” Sloan told BPN following the meeting. Propane marketers and consumers must be aware of where their supply is coming from and be more willing to make commitments to ensure that the supply is where they need it, when they need it.
He noted that the propane industry is facing other challenges on the demand side, but opportunities exist there, as well. ICF expects conventional residential demand to continue to decline nationally because of improvements in efficiency and competition from electricity. But real opportunities exist in the engine fuel market, as Fig. 1 shows, and those aren’t going to go away. Opportunities in the fueloil conversion market also look promising. Growth from those markets should offset losses in the more traditional propane markets.
As propane production continues to grow, producers must develop new markets for that increase, because it won’t come from the consumer market. That means additional exports and greater petrochemical demand are likely, and those markets are easier for producers to serve than the seasonal market. That again means propane marketers must be more proactive about lining up their supply and figuring out how to deal with seasonal fluctuations in demand.
The increase in propane production is linked to the broader growth in natural gas, natural gas liquids, and light oil production. The broad growth in petroleum production is leading to what Sloan sees as a major issue for the propane industry: congestion on the existing pipeline and rail transportation infrastructure. Consumer propane is competing with other NGLs for available pipeline transportation capacity. In addition to the issues caused by the Cochin Pipeline no longer carrying propane, the growth of diluent demand in Canada is increasing congestion on pipelines flowing north. And the need to move y-grade mixed NGLs to market from the new producing fields in the Bakken and the Marcellus has put a premium on capacity moving down into the Gulf Coast. Fig. 2 shows additional trends reducing seasonal propane transportation capacity.
The industry’s reliance on rail is also increasing because of the changes in supply, and rail reliability is a significant concern, particularly during colder-than-normal weather conditions.
With the additional demand reducing the availability of the transportation assets for seasonal use, Sloan observes that’s one more factor making it more important for marketers to make sure they know how they’re going to get propane into their markets when it’s needed.
In the absence of the Cochin Pipeline, the ability to move propane into the Midwest is much more limited than it was last year, but Sloan believes the problems will be relatively minor if the next winter is near normal. With growth in production from the Bakken, and use of available pipeline space on the Oneok, Teppco, MAPL, and Nustar pipelines, that should even out the problems. The pipelines in the past have been underutilized for much of the year, and even during winter periods when the weather has been warmer than normal, the pipelines have been underused, Sloan stated.
“There’s less underutilized capacity now because of the changing market structure, but there is still enough so that a fair amount of the Cochin volumes will be replaced through increased flows on other pipelines in the region,” he added. Without the Cochin, people will have to go a bit further with transports and bring more in by rail.
Marketers and their customers will have to make significant adjustments, but Sloan believes the available capacity should be there to allow them to make those adjustments. That is, unless demand this fall and winter resembles last year.
“And if we do get a high-demand fall and winter, I’m concerned about another year with periods of significant shortages in the Midwest.”
Fig. 3, showing data as of Aug. 15, supports Sloan’s view that available capacity should suffice in a close-to-normal winter. Propane inventories have been increasing rapidly at PADD 3, which includes Mont Belvieu and the Gulf Coast. Storage additions are averaging 1,165,000 barrels per week this year compared to an average of only 390,000 for 2011 to 2013. That puts Mont Belvieu in very good condition for this time of year, and Sloan feels that should carry over leading into the coming winter. PADD 2 in the Midwest is more of a concern. He noted that in addition to the Conway, Kan. hub, PADD 2 includes Midwest territory all the way from Kansas to Minnesota, Wisconsin, and Illinois. As Fig. 4 shows, also as of Aug. 15, PADD 2 storage injections are moderately higher than the last three years, with additions averaging 788,000 barrels per week this year. That compares to an average of 676,000 for 2011 to 2013. Speaking to BPN on August 1, Sloan noted that PADD 2 inventories a week earlier were at the bottom of the five-year range. He hoped the numbers the following week would show a solid build indicating inventories are moving up toward the five-year range. Without that build, marketers should be concerned and plan accordingly.
Nationally, inventories have been building nicely, but they have been distributed differently, with most of the growth coming in the Gulf Coast and less in the Midwest.
If this coming winter is closer to normal, the focus will turn to winter 2015-16. In 2015, as shown in Fig. 5, a clear disconnect is evident between the expected growth in propane production and the increase in propane export capacity. Fig. 6 shows some export terminals planned in the coming years.
“We can’t possibly export all the propane that could be physically exported by the higher amount of export capacity, and nobody expects that to happen,” Sloan noted. “However, the fact that the export capacity is coming online means we will be fully connected with the international market, and much of this capacity growth will be utilized.”
He has heard that export terminals coming online will see a significant amount of use. Some of the facilities are reportedly fully contracted already, and most are at least partially contracted now.
“Given the increase in export capacity, that for me raises a very significant concern that we may see in 2015 and in 2016 what we saw in 2013, which was that when the export capacity came online, we saw a very rapid decline in inventories, setting up the problems we saw last year, particularly in the Midwest.”
The main message of Sloan’s presentation: If you don’t know where your propane supply is coming from, it may not be there when you need it. If next winter is a warm one, there won’t be any issues. If next winter is colder than normal, particularly in the Midwest, there could be issues similar to last winter.
“And for 2015 and 2016, given the change in export capacity, these will be the years where it’s really important for marketers to have figured out their supply situation. Because even in a warm winter, or normal winter, with that much export capacity coming online, marketers who have not committed for their supplies prior to the start of the winter may have significant difficulties finding available supplies during the winter.”