Welcome to winter

March 1, 2007 By    

Just as propane marketers nationwide had given up hope of squeezing a profit from yet another warm winter, a ferocious St. Valentine’s Day Blizzard punctuated a solid month of cold temperatures that saved a dismal heating season but wreaked havoc on the front lines.

Customers reached for propane’s warmth with exceptional demand across the entire eastern United States. Nationwide, ropane stockholders posted a record 16.5-million-barrel decline in February, a level more than 60 percent above the most recent five-year average of 10.3 million barrels, according to the U.S. Dept. of Energy.

Heating Degree Day (HDD) Statistics
Heating Degree Day (HDD) Statistics

The record draw reflected mostly the colder-than-normal temperatures that were experienced over large areas of the nation throughout the month.

Frigid weather, heavy snow and ice storms that arrived in late January and stayed into March taxed supplies and hounded propane shipments across U.S. roads and rails.

Meanwhile, New England and the mid-Atlantic states battled multiple crises as a rail strike, pipeline leak and weather-delayed waterbourne deliveries hit simultaneously in mid-February:

  • Canadian National Railway (CNR) employees went on strike Feb. 10, delaying shipment of all freight – including propane – and backing railcars throughout the CNR system. CNR provides about 40 percent of the propane supply and distribution for the New York/New England Region.
  • Foul weather offshore delayed waterborne propane imports desperately needed to replenish depleted marine terminals in Providence, R.I. and Newington, N.H.
  • On Feb. 20, a leak caused by a faulty valve forced a shutdown of TEPPCO’s 20-inch propane pipeline in Seymour, Ind. Supplies in storage at Todhunter, Ohio and Watkins Glen, N.Y. were quickly drawn down to empty while the pipeline company worked on repairs.

The ripple effects of those problems forced industry members to move propane long distances to ensure product availability. Northeast propane suppliers arranged for the transportation of propane into the region from storage facilities in Kansas, Michigan and Iowa. One supplier alone on Feb. 24 arranged for 27 transport trucks to haul propane into his New England service area, according to the National Propane Gas Association.

This year Last year
This year Last year

A number of states were granted hours-of-service exemptions within their own jurisdictions during the period. Additionally, NPGA petitioned the federal government to issue a regional 30-day exemption to insure that propane supplies reached customers.

“There seems to be adequate inventory even though we’re getting cold temperatures and a lot of winter,” says analyst David Hinton at the U.S. Energy Information Administration (EIA).

“You had some carryover inventory from last year and that helped. This was a ‘split season,'” Hinton explains, citing a warm beginning. “If the whole year would have been like this it would have been a different story.”

Judy Taylor, managing director at the Propane Gas Association of New England, was keeping her fingers crossed as marketers kept busy.

“The lines are starting to back up a bit at the terminals, but so far we are doing OK,” she says

“Our companies had quite a bit of storage in place and they have been very happy to sell some of it. Things can change quickly, but as of this week we have not experienced any service problems.”

A ‘giddy’ winter

“The next few weeks will tell the real story,” reports David Field, executive vice president of the Ohio Propane Gas Association.

“For the moment, it’s been wonderful as far as selling propane. There wasn’t any winter at all until the last three weeks, but now our members are jumping up and down and clapping. If you balance the cold weather with the earlier warm weather maybe it will be an average winter.”

Near-zero thermometer readings coupled with high winds had enveloped downstate regions of Ohio where bitter cold and heavy snow are relatively rare occurrences. frigid temperatures that caused widespread school closings throughout the state broke records set back in 1974.

“We’ve had a lot of frantic calls from customers who didn’t really need propane, but they saw the temperatures and got all giddy,” Field reports.

Wholesale Propane Prices (Cents per Gallon)
Wholesale Propane Prices (Cents per Gallon)

“The jet stream went down and brought all those frigid conditions with it, and it didn’t go away – it just sat there.”

The persistent plunge was welcomed by Buckeye State propane marketers who had entered into the fall with full stocks in the wake of last year’s disappointing heating season.

“Everyone was sitting on gas they had bought, waiting to sell it. They were uneasy, but they’re in better spirits now,” Field recounts.

At press time no major bottlenecks had been reported except for long lines at a terminal in Toledo and the various routine logistical challenges of getting bobtails routed to each customer’s driveway. Field says the spike in demand has been more of a factor than infrastructural breakdowns.

“The product is flowing in Ohio, but if it stays down in the single digits I can see difficulty there.”

Consultant Marty Lerum of Propane Resources says demand-based stress always hinders the ability to deliver propane.

“The propane retailers have been keeping their tanks full, and now that’s becoming depleted. They’re getting calls from people saying, ‘I must have a gas leak,’ and they don’t have a gas leak; they’ve been pulling a lot of propane,” he says.

And as higher-than-normal demand lasts, the local production and tank cars can’t keep up and marketers have to haul it longer distances.

Many consumers sought to save money by beginning the year with a limited supply of propane, says consultant Ron Gist, senior principal with Purvin and Gertz.

“A lot of customers have been running low inventories in their tanks, and they have to be out there buying in this cold weather,” he says.

The situation could deteriorate in a hurry – especially since a West Coast freeze diverted some key transportation assets.

“The railcars migrated out to California, and they’ll have to make a migration back to the East Coast where they’re needed now,” Gist says. (See related sidebar.)

Ramping up

Amid the potential calamity, some companies have begun the post-winter step-buying process by purchasing advance stocks of propane as early as January.

“They’ve started layering in propane for next year. That will be to support their marketing plans for next year,” Lerum explains.

“We’ve made a few pre-buys already for spring and summer,” says James Renaldo, director of sales and marketing for Niagara Energy of North Collins, N.Y. The company is taking advantage of its three-year-old, $1.3-million 367,500-gallon storage facility and rail terminal along with aggressive marketing. The site features double-spur line that accommodates eight tank cars, two transport stations and two bobtail-loading racks.

“Since 2003 we’ve been experiencing a 30 percent increase in load each year, and we’re on target to have that 30 percent increase this year,” Renaldo says. “We work the phones and let everyone know we’re here. We’re very focused on service.”

Lerum says wholesale propane was priced at 73 percent of crude oil’s cost in February. By May or June he expects it to be trading at 60 percent of crude due to an anticipated surplus of offshore supplies.

Gist agrees. “We think that coming up in 2007 the imports are going to ramp up; there’s going to be a lot of LPG coming into the market.”

Propane’s fabled volatility remains an ongoing factor in this scenario, Gist and Lerum concur, particularly as marketers saw an usual cost increase this past summer. “They peaked back in July, which should have been a low-price period.” By the end of the year retailers saw propane at 96 cents; in January it fell to 86 cents. “That’s quite a big drop,” Gist observes.

“The guys usually try to catch the bottom of the curve, but last year they had high prices in the summer. When the cold weather hit everyone had to go out and buy it” to ensure adequate coverage for the customer base.

“It’s always tough to get your arms around the pre-buy situation,” says Gist. “It’s really difficult to get an analytical number for you.”

EIA economist Neil Gamson says propane consumption in some regions has seen a significant upswing in 2006-07 compared to last year’s figures:

  • Nationwide average, no change
  • Northeast, plus 2.4 percent
  • Midwest, plus 0.4 percent
  • West, plus 2.4 percent
  • South, minus 1.3 percent

Estimates for average annual household heating expenditures are likewise higher than those from last winter:

Shuffling and shoveling

All of America saw the 100-plus inches of lake-effect snow that buffeted Buffalo and other areas of the Empire State. Niagara’s Renaldo tells of addressing an overnight 3-foot pileup.

“I spent the morning shoveling out switches so the railcars could get into the yard,” he recounts.

Renaldo says the nasty winter blast in his area “can be described as bedlam,” although it appears to be a happy bedlam. “It’s good for business – we’re not complaining a bit,” he quickly adds.

Logistical challenges for many in the propane industry this year abound. Snow and ice made transportation dicey, and huge snow piles made it near-impossible to gain access to customer driveways and tanks.

“It’s going full-tilt,” Renaldo reports. “Our supply is good and we have railcars in Buffalo to unload. We’re sitting in very good shape, but we do know there are people out there who aren’t in good shape.”

Winter sales were still on the low side in Michigan until parts of the state experienced one of the coldest starts to February in the past 100 years, according to Derek Dalling, government relations director for the Michigan Propane Gas Association.

“There was a lot of doom and gloom around the industry at the beginning of the year,” Dalling says. “Things are looking much better than before.”

Most hard-hit states were able to obtain driver hours-of-service exemptions as nasty weather struck. Almost 50 emergency exemptions from the federal hours-of-service (HOS) rules enforced by State transportation or police authorities were issued in late January and February alone.

Generating attention

In Oklahoma, wicked ice storms and massive, sustained power outages wreaked havoc for consumers throughout the state.

“Be careful what you wish for because you may get a cold winter – and we’ve had one this year. It’s one of the coldest winters I can recall,” notes Richard L. Hess, executive director of the Oklahoma Propane Gas Association.

“It’s made for a busy heating season in terms of sales. There has been a supply crush or two but it’s not too bad. We had difficulties getting into some residential and commercial accounts (because of fallen trees and power lines) and lots of people needed propane at the same time.”

HOS exemptions were promptly granted, and the lack of electrical current brought to light the benefits of LPG.

“Propane is saving the day for some people, and it will certainly make people look at propane more closely,” Hess says. “There were entire communities without electricity for a while; propane generators were noticed. It has piqued interest in propane generators, and a lot of people are now adding propane generators to their homes.”

Hess is formulating plans to launch a media campaign that pushes propane’s versatility when future utility problems sweep across the Sooner State. “This is something we need to look at promoting.”

Minnesota marketers were still on edge in early February because of winter’s warm start and a weak crop-drying season. They were 600 degree days behind normal levels – 10 percent down – and hoping for more cold to come.

“That really put us behind the eight-ball a little bit,” says Roger Leider, executive director of the Minnesota Propane Gas Association. “It leaves a little to be desired, but it’s still better than last year. We’re going through some product right now, but it’s pretty hard to catch up from being that far behind. There’s a lot of opportunity to have a good winter yet.”

North Country retailers remain optimistic about their prospects, however.

“I haven’t heard of anyone yet who is pulling the pin and getting out of the business,” Leider says.

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