LP Gas

Marketers urged to cultivate several propane supply options prior to winter’s arrival

With record levels of LP gas exports, plus pressure on the availability of rail tankers and truck transports due to the nation’s heightened shale drilling activity, propane retailers are being advised to line up several product sources going into the winter heating season.

Factor in a bumper crop of fall grain-drying load expected this year and retailers have plenty to track as temperatures move downward.

“Get supply security by diversifying your supply points in your locale,” suggests consultant Marty Lerum at Propane Resources. “What are the alternatives in your area? Every area is unique. I wouldn’t just be buying from the single cheapest source. This isn’t the year to be giving away your supply security.”

Too many marketers are reluctant to pursue this key strategy, according to Lerum.

“They don’t look at it as an insurance cost, which is what it is. It’s like saying you’re not going to buy home insurance because ‘I don’t think my house is going to burn down this year.’ It’s not very smart – you really want to diversify your supply.”

Bountiful crop-drying draws, driven by wet weather and a large late-spring sowing season, could have a significant impact, though prolonged late-summer heat or crop damage from severe storms always have the potential to alter the ag estimates.

“There are some big volumes that will be coming out,” Lerum says. “It will have more of an impact on the distribution systems; marketers may have to go farther for their propane, and that may push costs up 15 cents a gallon because of higher trucking costs.”

And with more natural gas liquids pipeline infrastructure in place by this winter, more propane will bypass Conway and go straight to Mont Belvieu. If enough demand arises in the Midwest, inventory could get tight in Conway and force prices up, above those being paid at Mont Belvieu, Lerum says.

Conway’s propane prices jumped over Mont Belvieu’s by more than 10 cents a gallon in 1989, 1990, 1993, 2003 and 2008, he notes.

“The inventories are tight,” says D.D. Alexander, president of Global Gas Inc. in Englewood, Colo., which covers a 21-state marketplace from Wyoming eastward to the Atlantic coastline.

“They’re taking everything they can to the Gulf Coast for export,” she says. “There’s going to be a lot more propane shipped to Mont Belvieu, so supplies could be tight in the Midwest. If I was a Midwest marketer, I’d seriously look at locking in my supply and price.”

“Most of the Corn Belt is having a good year,” says Mark Leitman, director of business development and marketing at the Propane Education & Research Council (PERC). “It put the industry on alert – we have a late crop and a wet crop: Let’s make sure we have a strong supply nearby. It can really strain our delivery structure if we have a spike in demand.

“In an extremely heavy grain-drying year, we can see at least a 200-million-gallon increase in propane use in the grain-drying states,” says Leitman, citing figures from the high-volume 2009 season.

“Our propane industry is preparing for this, and they’ll be ready for it,” he reports. “Farmers are pretty sophisticated, so they’ll be planning ahead.”

American growers planted more than 97 million acres of corn this year, amounting to the highest corn acreage since 1936, according to the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS).

Hampered by cold and wet weather in early spring throughout much of the major corn-producing regions, only 5 percent of the crop was planted by April 28, making it the slowest seeding pace since 1984. In May, however, weather conditions improved enough “to make great strides in planting,” NASS says.

With 64 percent of the corn crop rated in good to excellent condition as of Aug. 4, NASS forecasts this year’s yield at 154.4 bushels per acre, the third-highest amount on record.

“There will be a lot more drying, up by 50 percent throughout the entire Midwest,” says Brent Smith, owner of E. Brent Smith Farm in Zionsville, Ind.

Smith says in a normal year his farm uses about 60,000 gallons of propane, and this year he anticipates a load of 80,000 gallons to 90,000 gallons. His biggest year was 2009, when he used 120,000 gallons.

The Southern States Cooperative, with 200,000 members in 17 states, relies on advanced stockpiling and spot buys of propane to meet its crop-drying needs. Vice President Tracy Amburgey expects an above-average season, adding that climate conditions leading up to the four-to-six-week drying period will ultimately dictate the draw.

“It has the potential for being very good,” he says, “but it depends on the end of the season.”

Encouraging diversification

Sustained cold snaps and subsequent spikes in demand could spark bottlenecks and worse during the winter. And wise marketers are taking heed, according to Alexander.

“There’s a pretty good pre-buy demand out there; people will go ahead and lock in their prices. Everybody understands the allocation issue, so everyone’s trying to get their customers’ tanks filled by the end of September,” she says.

Expecting a “bumper year” in fall fills, Lerum reports that propane retailers on average have been dispensing 100 gallons more into each household account’s tank during this summer/fall season than they did last year, adding up to some 600 million gallons in increased demand from June through September.

Retailers’ own storage should also be up to capacity, and arrangements with several supply sources should be made prior to winter’s onslaught, Alexander says.

“The No. 1 thing is to diversify your supply, and there isn’t one supply point that’s the answer,” she asserts. “For the Northeast, with the international market being so strong, people have to rely on pipeline, some rail and the refineries. With railcars being so tight, there might not be spot railcars available, and that goes for trucks also. I wouldn’t just be leaning on the railroad – people have a false sense of security.”

Alexander observes that a lot of people have switched to rail in the Northeast, “but if we get a lot of snow and ice on the rails, it slows them down.”

In addition, cold temperatures can wreak havoc on the air brake lines, forcing an interruption in rail operations.

“We just don’t have railcars sitting around, and there’s not any backup because trucks are in short supply.”

Echoing Alexander, Lerum also encourages diversification in making arrangements for supply needs.

“They’d better do it now before it breaks apart or they’ll pay through the nose or not get the service,” he says. “So many trucks have gone into the shale oil plays, and railcars are tight for the same reason.”

Expanded exports and a domestic demand for more heat can only exacerbate the situation.

“If we have a ‘normal’ winter, we could see the distribution system break down,” Lerum says. A mild winter may result in an overall pattern of flat pricing as supply holds. Should a cold winter unfold, “I think people will be surprised at how high prices will go.”

Lerum also says retailers have not positioned as much propane this year as they did last year and in previous years because they believe the price will go down, and it did last year.

Propane’s production amounts were higher than the load disseminated during the winter of 2012-13, “but the pendulum has swung the other way,” Lerum says. “The demand is up, and it is outstripping production.”

Reducing routing costs

Because having a steady cash flow is so much better for the bottom line, Lerum laments that so many marketers have yet to earnestly embrace signing their customers up for monthly billing cycles.

“Propane retailers are terrible at getting people on budget pay,” he says, citing the effort and financial investment needed to mount direct mailing campaigns, personal interactions and other marketing techniques.

“They won’t pay the money and they’re too lazy,” Lerum continues, telling of a dealer on the East Coast who was bringing in just $3,000 a month seven years ago, threatening the very existence of his business.

Upon pushing budget pay, however, the company is now ringing up $90,000 per month, and the owner no longer needs to seek bank loans to pull him through.

Another appealing aspect of budget pay is the ability to slash overhead by routinely keeping everyone’s tank full to the brim.

“Your routing costs go down because you can fill them at any time,” Lerum points out. “Every mile you cut off will save you $3 a mile on every one of your bobtails. You can get 5.2 deliveries down to 2.7 deliveries per customer, and that’s a lot of miles. I’m a huge fan of budget plans.”

SIDEBAR

EIA: Prices for propane, other NGLs moderate over last 12 months

Daily spot prices for natural gas liquids (NGL) – propane, ethane, normal butane, isobutane and natural gasoline – have moderated because of a combination of ample supply, flat or moderating demand, export constraints and domestic infrastructure constraints, according to a report by the U.S. Energy Information Administration (EIA).

Spot propane traded at an average of 89 cents per gallon in the first half of 2013, compared to $1.12 per gallon in the first half of 2012. Since July 2012, propane prices have remained relatively flat. The average propane price for the second half of 2012 was also 89 cents per gallon, the same as for the first half of 2013.

Propane is a petrochemical feedstock, similar to ethane, but also serves as an important home-heating fuel. Net propane production was up 8 percent through April 2013 compared to the same time period in 2012. The price effects of increased production have been mitigated by increased exports. Propane/propylene exports, primarily going to Latin America, are up 42 percent through April this year versus the same period last year.

Ethane spot prices have been below the 2007-to-2012 range for every trading day in 2013 so far. For the first six months of 2013, ethane prices averaged 27 cents per gallon, more than 45 percent below the price for the first six months of 2012. Ethane prices have been low compared with natural gas prices, prompting gas processors to leave it mixed in the natural gas stream, a phenomenon referred to as ethane rejection. Accordingly, net ethane production was down 9 percent for the first four months in 2013 compared to the same period in 2012, which may be applying some amount of price support.

Ethane demand comes almost exclusively from petrochemical plants, which have significant capital costs and take several years to build. Pipelines or liquefaction facilities to export ethane also face time and cost constraints, but there are projects underway to send ethane to the Gulf Coast to be processed, to export it to Canada and to liquefy it and export it to Europe. The United States began exporting ethane in July from the Marcellus shale play to Canada.

Normal butane and isobutane spot prices have recently moved together, falling by 22 percent and 23 percent, respectively, in the first half of 2013 compared with the first half of 2012. By the end of June 2013, both products were near or below the 2007-to-2012 range for this period. Since both normal butane and isobutane are important blendstock for motor gasoline, lower-than-usual gasoline demand may be reducing demand for these products and applying downward pressure on their prices. Increased supply may also be pushing prices down. Net production levels of normal butane and isobutane were up 9 percent and 12 percent, respectively, for the first four months of 2013 compared to the first four months of 2012.

Natural gasoline prices fell by about 8 percent in the first half of 2013 compared to the first half of 2012, averaging $2.14 per gallon, down from $2.34 per gallon. Natural gasoline prices have remained highly correlated to movements in crude oil prices in recent months, unlike the prices of other NGL products. Production of natural gasoline (which is referred to as pentanes plus by producers and in EIA reports) is up about 8 percent so far this year compared to the same period last year. Natural gasoline can be used as a diluent (a diluting agent) for heavy crude oil, or as a blendstock for motor gasoline (regular 10 percent ethanol blend as well as high-percentage ethanol blends known as E85).

Photo courtesy of Combined Energy Services