Attendees Seek Answers on 6 ‘C’s of Supply Situation

Attendees packed the propane supply sessions at the National Propane Gas Association’s (NPGA) Southeastern Convention in April. During the general session on the event’s final day, NPGA chairman Gary France focused additional attention on the product availability topic, as he noted that NPGA will work hard to make sure the industry doesn’t see a repeat of last winter’s supply and infrastructure problems.

France, owner of France Propane Service (Schofield, Wis.), told the audience that like all the propane marketers in the room, the supply problems that the industry experienced were a personal issue for him. He bought the assets of his family propane business in December 1989 during a winter with similar extreme weather and supply constraints. France’s son, Patrick, who began working full-time with the company this year, experienced the same issues his father experienced in 1989 and saw first-hand how a heating season can quickly turn sour for the propane industry. A heavy, late grain drying season moved into a record cold winter, while exports drained domestic propane supply. That caused a spike in propane prices, upsetting customers and drawing less-than-positive media attention to the propane industry.

“I don’t know if you want to call it passion for this industry or a father’s love for his son, but I never want to see this happen again,” France said.

Working toward that goal, NPGA has commissioned a task force of industry members to conduct a post-winter analysis that will identify causes of the problems and make recommendations to ensure the industry is better prepared next time around.

France introduced Mike Sloan, principal for ICF International (Fairfax, Va.), saying that the purpose of this year’s general session was not to dwell on the past, but to review what happened this past winter and determine how to ensure the problems don’t occur again.

Sloan first explained the numbers behind what caused the problems of last winter. The industry was short on supply, he noted, because of the six “C”s: crop drying, cold weather, cargo exports, capacity outages and constraints, Canadian demand and inventory, and the Cochin Pipeline outage.

Propane production in the U.S. increased by 1.4 Bgal. last year, so why was supply short? The combination of the six “C”s occurring at once was hopefully a once-in-a-lifetime confluence of several different issues.

ICF estimates that grain drying consumed 300 to 350 MMgal. of propane last year. That’s not at historic levels, although it is higher than in the past three or four years. The recent peak in grain drying demand was caused by a delay in the harvest because of cooler-than-normal weather throughout the summer and then above-average rainfall in October. The grain drying also started late and finished late, right before the start of the heating season. Sloan displayed a chart showing the date of corn crop maturity was about three weeks later than a year prior. In the Midwest corn-growing regions, October was significantly wetter than average, and in some areas historically wetter than average.
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atlanta img-3Then came the cold. This year was about 7.5% colder across the country than the 30-year normal weather averages. Sloan noted this winter was more than 10% colder than 2012-2013 and almost 30% colder than the previous year. The Midwest saw historic low temperatures.

“So the region of the country that just finished up one of the highest grain drying years in the last five to 10 years immediately jumped into the coldest weather it had seen perhaps ever,” Sloan explained.

That led to a significant jump in propane demand. The 2013/2014 winter consumption was 670 MMgal. higher than it would have been with the winter weather of 2012-2013. From October to March, frigid weather added about 410 MMgal. relative to the previous winter, and grain drying added about 260 MMgal.

Could the problems of this past winter happen again? In 2014 ICF expects propane production to increase by a bit more than in 2013. Sloan predicted a 20% to 25% chance that the crop drying situation would be the same next year.

“It’s unlikely, but we know it’s going to happen again,” he said. “We just don’t know if it’s this year, next year, or the year after.”

Cargo exports will increase, and new export facilities will substantially increase export capacity. The industry will not likely see the same degree of capacity outages and constraints that took place this winter. Sloan hopes the facilities and companies that experienced those outages and that have the capability of scheduling them in the future will not do so during November and December, and hopefully the number of unintended outages will decrease as well.

In the area of Canadian demand and inventory, “Cochin is gone,” Sloan stated. “They’ve stopped putting propane in the pipeline already.” All of the propane was scheduled to be removed from the system by the first week of May, so the pipeline that brought 323 MMgal. of propane into the Midwest last year will no longer be available. The supply is still in Canada, but it will be harder to get it to where U.S. propane marketers need it.

Sloan provided an outlook for the future, noting that propane supply will continue to grow aggressively. ICF forecasts total North American production of propane from gas processing plants will grow from 13.8 Bgal in 2013 to 22.8 Bgal in 2020.

However, several planned export terminals, including a Targa Resources terminal in Galena Park, Texas, scheduled to start up in the third quarter of this year, will significantly add to current export capacity, and export capacity is expected to grow faster than propane production in 2014 and again in 2015.

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As a result, Sloan contends that exports could limit summer inventory builds, and reduce propane availability for domestic markets next winter unless marketers and their suppliers commit to holding propane in storage this summer. If marketers don’t know where their winter supply is coming from, it probably won’t be there when they need it.

Marketers should also consider new storage capacity and develop multiple sources of supply, especially if they rely on rail. Building summer load is even more important than in the past in order to build winter supply allocation and to reduce seasonal swings in propane demand.

His presentation posed the question of how consumers will react to propane’s problems last winter. Competitors are reminding their customers about it, and Sloan emphasized that propane marketers should be proactive.

Even though the industry should look to the future to prevent a repeat of last winter’s supply problems, France complimented the propane industry’s work in coming together to get through the tough times. U.S. Energy Secretary Ernest Moniz requested a meeting earlier this year with France to discuss the issues. “I couldn’t help but think, how would this ever have happened without our national trade association?” France asked. Because of efforts of NPGA staff, DOE implemented an emergency order for the Federal Energy Regulatory Commission to put an additional 500,000 bbl of propane in the pipelines. That eased the problems almost immediately, he noted.

“We had a staff in Washington, D.C. that knew what was going on. They were part of our family and knew exactly what to do and they did it, and I thank them very much.”    —Daryl Lubinsky

Task Force Works on Game Plan for Future Winters
The National Propane Gas Association (NPGA) executive committee in January launched a supply and infrastructure task force to conduct a post-winter analysis to identify causes and contributing factors of this past winter’s supply and infrastructure issues and make recommendations for future strategies. The task force consists of industry experts from all regions of the country, including representatives from NPGA’s supplier section, supply and logistics committee, and pipeline advocacy task force. Also included were representatives from the Propane Education & Research Council and state propane gas association executives.
Tom Van Buren, chair of the supplier section and the pipeline advocacy task force, told attendees of the NPGA Southeastern Conference in April that the task force plans to release a report prior to the Propane Days event in June. But he noted that the task force is working on three strategic areas: education and best practices; policy recommendations and business efforts working with NPGA’s industry partners; and developing a game plan for future winters by working with state and federal agencies and NPGA’s supply and logistics partners. Working groups within the task force are in the areas of public relations/communications, consumer education, marketer education, Cochin reversal analysis; infrastructure and distribution; and exports and national inventory.
“We’re in a whole new world of changes that will continue to evolve, but we also have opportunity,” Van Buren explained. “At this point we have to consider what we are each going to do individually, but also collectively together to adapt and overcome.”