Industry reaches ‘far afield’ to ensure adequate propane supplies during winter

March 10, 2011 By    

After a seemingly endless series of record-setting winter calamities whipping across the country, amid stress-inducing issues with pipelines and waterborne imports, the arrival of Valentine’s Day was signaling that the nation’s propane providers were once again able to weather the storm.

“The volumes were there and the margins were there, so it should be a good year,” says consultant Marty Lerum at Propane Resources. “Some of the distribution lines broke down, but people had enough time to prepare for them.”

While consumers reeling from sticker shock are probably not sending a whole lot of love your way, and collecting on the invoices might present ongoing difficulties in a down economy, the propane industry can take heart that the gas kept flowing under tough conditions.

Scrambles for supply, bottlenecks, long journeys and a reliance on railcars were among the elements in play under a pressure-packed scenario mitigated by adopting suitable contingencies for such situations.

“This certainly has been an exciting season, something all the analysts were looking at,” reports Laurie Hopkins Falter, an economist with the Office of Petroleum, Gas & Biofuels Analysis at the U.S. Energy Information Administration (EIA). “Despite all the difficulties, we made it through with enough product for everybody – but they did have to pay higher prices, and much of that price pressure has been in the Northeast.”

A senior executive at a major nationwide retailer, requesting anonymity, describes the overall season’s performance as “steady with strong demand and orderly,” adding that “some people always say that it’s a big crisis, but the roads have remained clear and the trucks have been able to move.” Yes, there have been allocations, delays, shutdowns, hours-of-service concerns and long lines at terminals, but what else is new? “There’s been extra money spent on trucking, but that’s about it,” the executive concludes.

Given the various volume, pricing and transportation factors, “I’m surprised that it hasn’t been more chaotic,” says Harry Hanger at Plains Mid-Atlantic Marketing. He answers his own observation by explaining that “the wholesalers and retailers are getting much more adept at reaching far afield” to ensure that they have adequate propane supplies. “Everybody is getting more familiar with how to do that because they now expect it,” he says.

Hanger notes that “trucking has picked up the difference that the pipelines haven’t been able to ship. Trucks are coming in from the Midwest and West to help with the situation, and companies ordered railcars from further out west.”

Plains has expanded its marketing sphere up and down the East Coast via its underground storage site in Tirzah, S.C. “People reach for underground barrels” when Mid-Atlantic supplies start tightening up, Hanger says.

New England rallies
As the season eased into a mid-February thaw, the hardy New Englanders were nonplussed and taking everything in stride, having rallied to make sure their customers never lacked for heat.

“It’s been busy, it’s been cold and the snow has presented some challenges,” says Joe Rose, president of the Propane Gas Association of New England (PGANE).

Advance warning of the looming pipeline problems in the Northeast meant that “people were able to go out and sign up for tank cars six months ahead of time,” according to Lerum.

“The No. 1 thing that came across is that the systems are there to take care of things if you plan ahead,” he points out. “The systems are there in place if you want to plan ahead and pay for it. They will hold up under any situation.”

Among a lot of marketers, 25 percent to 30 percent of their business was already accounted for with supplies locked in. “There are more people who spent ‘insurance dollars’ up front, and it paid off,” Lerum says.

“I can’t see that anyone who bought propane going into the winter is getting hurt,” concurs consultant Dale Delay, president of Cost Management Solutions LLC.

“If you’re reacting at the last second, you probably didn’t do enough planning,” says John Duchscherer, director of propane marketing at CHS Inc. “We’re preparing for next year already, and we’re looking at alternatives,” he notes, citing the high cost of this season’s imports off the high seas. “I think we’re going to see a fundamental shift to more railcars next year.”

“Anytime you put a surge on the system, it’s a stressful situation,” according to consultant Gordon Regan, president of Regan Enterprises. “That requires careful planning in the spring and summer.

“I would be getting my programs ready and going ahead and locking in those margins,” Regan continues. “It’s always good in the spring to analyze the market and see where it’s going – start layering stuff in. We don’t want to get anywhere near the winter with our tanks empty, because once you get behind it’s hard to catch up.

“When you’re laying out a supply plan, look at the total cost rather than the cheapest price,” Regan says. You need to be certain that your supplier can actually deliver the gas when nasty weather strikes while also allowing for contingencies if things go awry, asking yourself, “What will my cost be if I have to go elsewhere?”

“It’s like a chess match,” according to Ken Hess, general manager at Rich Energy Inc.

“The weather dictates a lot of the activity, and it’s been a cold winter,” he says. “You scramble and shuffle things around from one terminal to the next and try to get your customers the best deal you can. The margins stay the same, but it’s higher costs for the end users who pay the freight.”

Building more load
This season highlighted a seemingly pronounced pattern of propane customers backing off on their thermostats no matter what the weather brought.

“We’re seeing a lot of conservation going on, and with the type of snow pack we’re having it’s rather surprising,” Duchscherer says. “There’s conservation going on across the United States. We’ve had good, cold weather and it will be a solid winter season, but the conservation is taking some of that away.”

Ferrellgas is experiencing the same situation, which is especially prevalent in Washington and Oregon. “We are experiencing the highest levels of customer conservation in the Pacific Northwest this year,” says spokesman Scott Brockelmeyer. “Throughout the region, there are clear trends of customers requesting minimum deliveries instead of tank fill-ups. Higher propane prices have all customers – homeowners and commercial customers – analyzing usage and searching for conservation methods.”

After they got their first invoice of the season, people across the nation were exclaiming, “Oh my, I have to do something,” Lerum recounts. A pattern of budget-busting propane bills has them closing off rooms, plugging in electric space heaters, firing up the ol’ woodburner and otherwise cutting back on their LPG use.

“Now it’s become a habit.” he says. This trend “speaks volumes” about the possibility of diminished propane consumption levels going forward for as long as pricing remains high.

“Demands aren’t as strong as they used to be; we’ve probably peaked in home heating demand,” says Lerum, emphasizing the importance of propane marketers embracing the concept of becoming actual propane marketers rather than order takers.

“You need to market year round,” he asserts.

Business owners need to get out there and sell the product in a consistent effort to build load and develop heightened management efficiencies, according to Lerum.

Make continuous pushes to sign up new customers in the spring, summer and fall, getting them situated and on budget plans before the first flake falls – all the while remaining on the hunt for enhanced revenue streams such as appliance add-ons. LPG hot water heaters, lawnmowers and transportation-oriented applications are among the possibilities that you should be investigating. “Most propane marketers don’t have any idea what kind of water heaters their customers have,” Lerum says.

Direct mail campaigns and word-of-mouth referrals among folks gathered at their local churches and schools are among the suggested methods for getting ahead of the competition. “Move from an operations mindset to a marketing mindset,” Lerum says. “You’re going to have to be better marketers.”

He describes as vastly behind-the-times the traditional retailer who merely places a listing in the Yellow Pages and “waits for the phone to ring, tells them what the price is and sees if he gets the account or not.” Such a strategy is no longer sustainable, according to Lerum.

And while cheerfully acknowledging that he is indeed a consultant, Lerum goes on to point out that the complexities of staying in business requires at least some sort of professional assistance. Being proficient in operations, marketing, accounting and tasks such as preparing an attractive website can be overwhelming for an independent propane proprietor.

“There are a lot of hats to wear, and you’ll need a way to get help with those other hats,” Lerum says.

Keeping a lid on the cost of covering your routes is especially crucial. “You’re going to have to lower your overall delivery expenses,” he says, which means actively pursuing spring, summer and fall fill-ups.

In addition to gaining the on-site storage and a steady flow of monthly payments, you have fewer deliveries to make under adverse conditions when winter hits with a vengeance. “Instead of five stops a year, you make two or three,” Lerum says.

In these recessionary times, “it’s going to be very important for the dealers to stay on top of their receivables,” advises D.D. Alexander, president of Global Gas Inc. As customers fall behind on their payments, “it’s going to be an issue with cash flows” for marketers in need of meeting their own overhead expenses.

In California and Arizona, “the economy is getting a little bit better, but we still have to watch our receivables more than we used to,” says David Humphreys, president of United Pacific Energy. “The volumes have been getting better in the past couple of years; they’re not as panicked.”

A key harbinger for Humphreys is a rise in vacation activity around Lake Tahoe. “The mountain resort areas are doing really well,” he says. “I don’t think there’s anything new being built, but what’s there is being used.”

On Whidbey Island in Washington’s Puget Sound, sales are heating up for Fraser Mann’s line of propane-powered hot tubs.

“This fall and winter I’ve sold more than in previous years. The price for propane is down in my market area,” says Mann, owner of the Island Hot Tub Co. “Every time the price of propane goes up my sales go down, but then people forget about it and my sales go up again.”

Overcoming winter’s wrath
EIA economist Neil Gamson reports that a key factor in the industry’s ability to maintain supply – even with a series of daunting logistical challenges – was an overall weather pattern that had the well-televised brutal conditions bouncing around the nation in such a way that allowed propane providers enough respite to adequately facilitate regional drawdown demands.

There was plenty of wicked weather dished out by winter’s wrath. At one point, 16 Midwestern states were dumped upon by more than a foot of snow, with some lodging up to 27 inches. Parts of Missouri and Illinois were draped in 4 inches of powerline-crippling sleet, and 300,000 residents of the Washington, D.C., area were left in the dark without electricity.

Temperatures in the Adirondacks dipped to minus-36 degrees as New England was enveloped with the coldest air in six years, including being battered by three major storms in three weeks. Four feet of snow fell in some areas. Connecticut experienced multiple roof collapses when 14-and-a-half inches piled up in a single night. Amtrak’s route between Boston and New York City was left standing at the station as the Big Apple had its snowiest January ever with more than 56 inches; the yearly average is a paltry 22 inches.

At one point, every state in the union except Florida was covered in measurable snowfall, including Hawaii with its snowcapped mountains.

And even the Aloha State wasn’t immune to propane shortages as mechanical problems forced a five-week shutdown of Chevron’s Oahu LPG refinery.

“We were hurting for a while,” says Ron Templeman, general manager for Hawaii at AmeriGas. “We had to restrict deliveries.”

Being in the middle of the Pacific Ocean, Hawaii has no natural gas supply, which means propane is a prime fuel source – especially for its luxurious lineup of resorts and their busy laundry services, heated swimming pools and ubiquitous tiki torches.

Thirty large tanks of propane were shipped in from Seattle, but the gallons were uncomfortably tight for a time at the peak of the tourist season.

“If we knew people didn’t need the gas, we didn’t deliver it,” Templeman says. Hospitality managers eager to please their vacationing guests were none-too-happy when “we asked some of the hotels to turn off their pool heaters, tiki torches and other nonessential items,” he adds.

After a weak fall crop drying season on the mainland, “we were happy to see the cold weather and increased demand,” says David Lugar, AmeriGas’ vice president of supply and logistics.

“It’s been tight from time to time; it seems to be happening all over the country,” he reports, “but we were able to have our propane where we needed it.”

As the season unfolded “we were able to swap some railcars around, and we have a lot of flexibility with our trucking fleet,” Lugar says. “It was a challenge for some of our drivers when we moved them around,” as they traversed unfamiliar routes and spent extra nights on the road, “but they did what it took to make it happen.”

The Sunshine State saw two potential freeze episodes, but any threats posed to the tomatoes, green peppers and citrus crops were abated by the use of water misting systems and the availability of LPG field heaters, which are colloquially called salamanders.

“There are a lot of water wells running with propane-powered engines,” says Vernon Krutsinger, marketing manager at Sea-3 of Florida Inc.

“The volumes are pretty consistent, and there hasn’t been much impact because it’s not as cold as last year,” he says. “We’ve had three weeks of cold weather, but none of it has been sustained.”

Propane providers in the Northeast have remained stoic over dealing with the logistical issues involved with keeping the gas flowing.

“The wholesalers have plenty of product and the railcars are running on time,” says Norm Guerette, the PGANE’s secretary and a regional manager for the Dead River Co. in Portland, Maine. “It’s looking like an old-fashioned Maine winter with cold temperatures and snow – the customers are coping and we’re helping them stay warm.”

“We’ve had some consistent below-zero weather for the first time in a few years,” according to Rick Card, the PGANE’s vice chairman and CEO of D.F. Richard Energy in New Hampshire. He too expresses pride in the industry’s ability to do whatever it takes to ensure a steady flow.

“Supply is not an issue,” he says. “It’s what we have to pay for it and what our customers have to pay for it.”

The season has been decidedly “out of whack” for Mike Tracey at Sea-3, however, where business from imports off the high seas was down by one-third this year. “We got a contract,” he explains, “but it’s based on international pricing instead of a Mont Belvieu-related price.” Resulting differentials of 70 cents per gallon have had a “devastating” impact, spurring marketers to purchase their propane via rail and opt for lengthy truck trips.

“Hopefully this is just a bump in the road,” Tracey says. “We’re hoping that in a free-market system that this will right itself, but nobody knows when it will turn.”

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