Uncertainty reigns

September 1, 2008 By    

As the waning summer waxed into fall, uncertainty was the watchword among industry experts asked what this winter will bring.

“I wish I had a crystal ball,” says supplier William E. Cornell, president of SEA-3.

It doesn’t take a soothsayer to foresee that cash flow and collections activity will again torment marketers forced to hit the phones over past-due accounts.

According to the Energy Information Administration (EIA), last year’s average residential consumer’s propane heating bill amounted to $1,673. That figure is expected to reach $1,911 this winter, a 14.3 percent increase amid a customer base already under financial duress.

 Spot Prices (Cents Per Gallon*)
Spot Prices (Cents Per Gallon*)

Such predicaments can be particularly problematic for retailers uneasy about approaching long-term customers who have remained faithful on-time payers over the years. Yet it is a task that must be done to cover retailers’ own soaring costs, especially if they’re struggling to buy their own propane supply under terms requiring payment within 10 days.

“I can’t front the money for marketers with customers who are taking 45 days to pay; I have to pay my suppliers immediately,” explains Harry Hanger, manager of supply, risk management and marketing for wholesaler Atlantic Energy, which covers the Mid-Atlantic region.

“The biggest issue this year is financial constraints on both the marketer and consumer,” says Randy Hull, Southeast regional marketing director for Targa Marketing and Trade, formerly known as Dynegy.

“Credit lines haven’t increased since the gas was 60 cents a gallon. For the average independent dealer, the credit lines they have won’t cover the gas they need. This is new territory out there; we don’t know how the market will react. The industry will put product out there, but we don’t know if the consumer will have the money to pay for it.”

Farmers' Almanac forecasts cold winter
Farmers’ Almanac forecasts cold winter

“It’s a very, very awkward time,” agrees Mary Howell, executive director of the Virginia Propane Gas Association. “It’s a really tough position to be in. They want to have plenty of propane, but folks can’t afford it.

“A lot of us in the mid-income range are even feeling the pinch,” Howell observes. “Late pays are something our industry didn’t have to worry about until recently.”

Budget plans and pre-buys may be picking up steam, but the overall rate of acceptance among marketers and consumers seems to be slower than expected given rising costs of gasoline, other fuel sources and household expenses in general.

“We’ve had several customers locking in supply and locking in their customers,” says Hull. “The majority don’t do this and I don’t know why – they don’t play the game. Some of the states are very proactive and some are not.”

‘Best of our world’

Michigan is among the largest users of residential propane in the nation. The industry there has been pushing those options, according to Jeff Pillon, manager of energy data and security for the Michigan Public Service Commission.

Average Consumer Prices* and Expenditures for Propane During the Winter
Average Consumer Prices* and Expenditures for Propane During the Winter

“Some propane marketers offer programs that can even out those big bills – that’s just good business,” Pillon notes.

“There’s been a lot of activity in that area over the last several years. Some people have locked into a price, and they’re very happy that they have made that move.”

The days when retailers fixed a price to consumers, collected up front from the sale and covered their supply costs with pre-buys or similar financial tools appears long gone.

“That’s the best of our world,” says Dale Delay, president of Cost Management Solutions in Houston. Although propane is less expensive than some energy alternatives, there’s a problem with public perception when market price comes into play.

Stocks (Million Barrels)
Stocks (Million Barrels)

“The shock is when the consumer gets the bill and it’s higher than expected,” Delay says. “The consumer is responsible for the volatility and the risk, and they either get mad or go shopping” for another fuel provider.

In the Northeast, propane marketers are addressing the pricing issue with their pre-buy programs and budget plans, according to Joseph Rose, president of the Propane Gas Association of New England.

“People are scooping it right up. Supply is always a concern, but the advantage of the pre-buy and budget plans is that people get their tanks filled, he says.

“Some marketers in New England have added storage, but we’re still facing permitting issues. As long as we don’t lose a supply point for an extended period of time we should be fine.”

And it does appear that more people in the region are opting for propane as a primary heating source.

“The guys up in the Northeast have been mentioning that fuel oil – our old nemesis – has gotten so high that propane is an excellent buy now. They’re saying they’re doing a lot of conversions,” says Cornell at SEA-3.

“We’re offering a rebate program for customers who are switching,” Rose confirms. A consumer is paid $500 if the hot water and central heating are converted to propane.

“The checks are flying out. The level of activity is incredible,” says Rose, who reports that 10 to 12 checks were being issued weekly in late summer.

Lacking a safety net

“The (cost) increase in propane for this year is smaller than for heating oil or natural gas,” observes EIA economist Tyler Hodge. Heating oil’s cost is forecast to grow 31 percent, while natural gas prices are expected to jump 22 percent. Electricity has the smallest increase at 9.4 percent.

“That’s a pretty big increase for electricity, but not when you compare it to other fuels,” he notes.

“There’s a great deal of uncertainty around any forecast,” senior EIA economist Tancred Lidderdale cautioned in late August.

“(Propane) prices will be higher than last winter, but the market is still heading downward. This is a very uncertain and volatile market in the last two years because of the crude oil market. There’s always a possibility that you’ll have some sort of disruption like a hurricane or unrest overseas.”

Aside from an unforeseen geopolitical development that could drive crude prices, the hurricane season is the wild card that could crimp supply, says David Hinton, an EIA petroleum industry analyst who monitors the nation’s propane stocks.

“It’s a slow build this year; it’s way below normal. Imports were down and pet-chem demand was high. By the time winter comes we’ll still be below” normal stock levels, he says.

“We’re going into the heating season without a safety net. If it’s a normal winter, we can muddle through. If we have a cold winter, there could be problems, particularly in the second half. It will put upward pressure on pricing, and that will depend on the weather.”

Cornell does not foresee a critical propane shortage.

“The offshore has been reasonably tight up to this point, but it should start loosening up. I’ve never seen us run out of propane, and I’ve been doing this since 1962,” he says.

In late summer, dealer demand at SEA-3 was down 10 percent to 20 percent. “They’re cutting back; people are cutting back on everything. I’ve been told by a number of retailers that they’re keeping their storage to a minimum because of the high price of the product,” Cornell says.

Two years ago, marketers were locking in twice the amount of propane at Atlantic Energy, according to Hanger.

“Most of them are being cautious. Last year they hardly locked in any, and this year everyone is nervous – they don’t know which way to jump.” This winter he expects many marketers will be paying – and charging – on a market price basis.

Infrastructure strains

“It’s been three years since this market has had a real test with cold weather,” Hanger observes. “If we have a ‘normal’ winter, our industry’s system will be strained.”

A particular point of concern is a reduced fleet of bulk transports that have been idled and unneeded in recent seasons, resulting in an industry sell-off of sorts.

“We believe there are fewer trucks to move product around. They’re cutting down on the number of units because they couldn’t justify the cost of keeping them,” he says.

Hanger’s specialty is importing propane off the high seas. Marketers typically contract to buy a certain percentage of propane from Atlantic as insurance along with patronizing other sources. The imports may be more expensive, but “I’m more reliable because I can reload quickly” should there be a run on supply, he says.

Buying direct from a refinery is the least expensive strategy, followed by purchasing off a pipeline, railcar deliveries and then ships. With two tanks totaling 20 million gallons, wet barrel storage can reload quicker than rail or the pipeline, says Hanger, citing the ready-to-roll volume that an ocean-going vessel contains in its hold.

In California, the larger agricultural producers have been proactively addressing the state’s infrastructure limitations in the wake of a crop-threatening 10-year freeze that struck several seasons ago. Propane-powered wind machines are used to dissipate the deadly frost.

“Some growers have put 18,000- to 30,000-gallon tanks in their groves over the past two years so they have extra storage,” says Lesley Brown Garland, executive director of the Western Propane Gas Association. “They’ve taken steps to make sure an event like that doesn’t happen again.”

In August, Enterprise Products Partners purchased from British Petroleum the remaining 26 percent interest in the Dixie Pipeline, prompting concern that allocation issues may arise. The pipeline has proposed revising tariff provisions for propane shipments that some fear would have major negative consequences for propane marketers serving customers in the southeast United States.

“Anytime you have new systems in place, there can always be unease,” says Greg Smith, who routinely deals with the pipeline as a Southeastern regional sales representative for Rich Energy.

“It’s still in the process,” says Smith, offering assurances that the pipeline plus the nation’s overall propane supply will continue to flow.

“Most of my customers know I’m going to find them gas wherever it might come from.”

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