Adequate infrastructure key to industry’s ability to source domestic supply

July 2, 2014 By    

The United States became a net exporter of liquefied petroleum gases for the first time in 2012, and a year later propane marketers across much of the country faced the greatest winter supply challenges of their lifetimes.

This should be a golden era for propane considering the amount of gas available domestically from various shale plays, but inadequate storage in key U.S. regions – plus the economics that have propane leaving U.S. borders at record rates – has the industry on edge as preparations are being made for the winter of 2014-15.

“I’ve been in the propane business almost 30 years, and it’s a travesty that we have all of this tremendous growth and supply in a region [the Utica and Marcellus shale plays of the Northeast], but you can’t bring it to the region when it’s needed because we lack the storage,” says Andy Ronald, vice president of commercial development and national accounts at Crestwood Midstream Partners.

Unfortunately for the industry, last winter’s supply shortages brought to light storage inadequacies in the Midwest and Northeast.

With crop drying predominantly in the Midwest, some industry leaders believe more storage is needed on farms to boost retailer efficiencies during high demand. In the Northeast, New England actually imported 87 million gallons of propane during the harsh winter.

“Because you don’t have storage, you have to get rid of it in the summer and get it back in the winter,” Ronald says. “The consumer was probably 95 cents higher [per gallon] last winter than he would have been had product from the Utica and Marcellus been stored in that region for the winter.”

So where can propane flow in the future to reduce reliance on nonsensical imports and best utilize the domestic supply that’s readily available in the U.S.? Here are four storage topics LP Gas has identified as critical to the industry’s ability to meet consumer needs.

Agricultural sites
Background: Industry officials say agricultural site storage is minimal, in some cases requiring marketers to make multiple trips per week – and sometimes multiple trips per day – to facilities during large harvests. When ag sites have these demands, such as during last fall’s record-setting crop drying season, propane inventories are diminished leading into the winter heating season.

Propane tank

Photo courtesy Propane Education & Research Council

Current standing: According to an American Petroleum Institute (API) report titled “2012 Sales of Natural Gas Liquids and Liquefied Refinery Gases,” 54 percent of all gallons sold into the U.S. agricultural sector in 2012 were to Petroleum Administration for Defense District 2, which consists of 15 states across the Midwest.

To help alleviate winter delivery pressures created by ag demand, the propane industry, through testimony National Propane Gas Association (NPGA) representatives delivered to congressional committees, is lobbying for government incentives for farmers and crop dryers who increase their storage capacity.

Perspective: NPGA President and CEO Rick Roldan discussed the importance of adequate storage at the customer level in his March testimony to the House Subcommittee on Energy and Power, positioned under the Committee on Energy & Commerce.

“Such increased storage would have multiple benefits, including resilience in the face of unexpected demand; reducing the frequency marketers need to fill the storage; and more closely matching the capabilities of the crop drying equipment itself,” Roldan says in his testimony.

Mark Leitman, director of business development and marketing at the Propane Education & Research Council (PERC) who specializes in agriculture, anticipates some farmers to add storage based on last crop drying season.

“As the farm grows or the heating load gets larger, they need to increase storage along with that so they have the right number of days of capacity,” Leitman says. “Clearly there’s an opportunity with some that are already set up for 10,000-gallon deliveries for 20,000- or 30,000-gallon tanks.”

Finger Lakes
Background: Crestwood Midstream Partners has planned a storage project in Watkins Glen, N.Y., that would create an additional 88 million gallons of propane supply – enough capacity to help prevent the distribution issues facing New York and other parts of the Northeast.

Current standing: Gov. Andrew Cuomo, D-N.Y., has yet to approve the Finger Lakes facility and is unlikely to do so while in office. At press time, the state’s Democratic Committee was reportedly planning to formally nominate Cuomo to head his party’s 2014 statewide ticket. Crestwood, meanwhile, continues to lobby for the facility’s approval along with the support of much of the propane industry.

Perspective: One course of action Crestwood took to impress the facility’s integrity upon the New York State Department of Environmental Conservation (DEC) was to conduct a strategic risk analysis. According to Andy Ronald, Crestwood’s vice president of commercial development and national accounts, the company embarked on the study to answer and satisfy every question the DEC raised over a 3 1/2-year period.

“At the end of that, we expected the DEC to give us a permit,” Ronald says. “But the process stopped, and it becomes an issue in the region of politics and a very small group of environmental supporters who are in various groups protesting the project. The logical flow of the political arena is that sometime this year after elections are over, you may get a different [political] environment.”

Crestwood is convinced of its project’s viability and that it will continue with its efforts until the project is approved, Ronald adds.

“Our commitment to this area is [exhibited] through every vehicle we have, whether it’s getting people in the region to understand the need for it and having them support it politically, or through the DOE (Department of Energy) and getting DOE existing support funneled to address all the infrastructure shortages,” he says. “I think we’re making inroads with that and I think the Department of Energy is thoroughly aware of the shortcomings by region.”

Background: Sea-3 Inc. plans to reconfigure a terminal in Newington, N.H., to accommodate rail shipments of propane and, ultimately, increase the facility’s off-loading capacity of domestic product. Like Crestwood’s Finger Lakes project, the Sea-3 project would be a supply improvement in the Northeast.

Current standing: A local planning board voted unanimously May 19 to approve Sea-3’s reconfiguration proposal, and a one-month objections period follows before Sea-3 can officially move forward, says Paul Bogan, vice president of operations at Sea-3.

“We’re very pleased with the decision,” Bogan says. “We’re in a position where things were looking very bleak for the future [of the region], and this now gives us something to look forward to.”

As part of the reconfiguration, Sea-3 plans to upgrade its existing railroad siding, install a new railroad siding with five discharge pads to accommodate up to 10 railcars, and install three 90,000-gallon aboveground tanks and associated chilling and pumping equipment. Bogan anticipates 12 to 14 months of construction to take place before the rail terminal is officially operational.

The reconfigured facility will have a reported storage capacity of about 24 million gallons. Bogan says the company’s focus will largely be on supplying the local market but that exporting is a potential opportunity during slower periods.

Perspective: According to Joe Rose, president of the Propane Gas Association of New England, Sea-3 had not brought in a ship to the Newington terminal prior to February 2014 for two years because of European arbitrage. The reconfiguration of Newington, however, gives the Northeast a second primary storage facility, with the other being an Enterprise Products-owned and DCP Midstream-operated terminal in Providence, R.I.

“To have that 24-million-gallon storage facility reactivated is huge,” Rose says. “Between the two facilities last winter, they brought in 87 million gallons [through imports]. We would be able to easily provide that many gallons by using the American rail [through the Sea-3 terminal].”

It’s estimated the Sea-3 facility could bring in 2 million gallons of propane per week by rail.

“If [Sea-3] can bring in 2 million gallons a week December through March, that’s 34 million gallons – plus what they have in storage,” Rose says.

Some questions about the facility remain, though.

“It’s rail dependent, and we know rail was very unreliable last winter,” Rose says. “The hope is if they can handle 12 railcars per day 365 days a year that they will achieve some dependable supply – 360,000 gallons a day in the best scenario. That’s 30 transports.”

Background: This storage facility in southwest Ohio has been well-positioned over the years to serve markets in Ohio, Indiana, Kentucky and Tennessee, and it is connected to pipelines that serve New York, Pennsylvania and New England. Its nine underground caverns, which were built from 1959-74, can hold about 40 million gallons of LP gas, according to ICF International. It also has 5,000 barrels (210,000 gallons) of aboveground propane storage capacity. The facility offers a four-bay truck rack capable of loading eight to 10 trucks per hour.

Current standing: The discovery of hydrocarbon vapors near the facility forced Enterprise Products, its owner, to take the underground storage caverns out of service. The process of emptying the caverns to conduct integrity testing began in late 2012 and was completed in the middle of last year. Because Enterprise has yet to confirm the integrity of the caverns for safe operation following the detected leak, it currently has no plans to return them to service. Its aboveground storage remains online.

Perspective: Loss of the 40 million gallons of underground storage certainly does not help the industry in high-demand periods. New England has referred to Todhunter as a stopgap source of propane supply in the winter. Enterprise says its truck rack remains in operation and believes the growing supplies of propane from the prolific Marcellus and Utica shale region will help accommodate a larger portion of demand as fractionation facilities come online in the coming months. Enterprise says it projects the available supply of propane from this region to more than quadruple – from about 64,000 barrels per day currently to about 292,000 by 2020.

Brian Richesson contributed to this report.

About the Author:

Kevin Yanik was a senior editor at LP Gas Magazine.

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