How drilling activity could affect propane production

One of the data points we want to keep a close eye on is propane production. The decrease in drilling activity for both natural gas and crude oil could cause decreases in propane production this year.

For the week ending Jan. 8, there were 148 rigs drilling for natural gas in the United States, down from 329 rigs drilling during the same week last year. The number of rigs drilling for natural gas in Canada has dropped from 185 to 95 year to year. Since most propane supply now comes from natural gas processing, the slowdown in drilling should be closely watched for its impact on propane supply.

Through October (the last official monthly data), both natural gas and natural gas liquids production has been on the rise. However, the table shows that there has been a slowdown in the rate of growth.

The table shows year-to-year changes in propane production by month. For example, propane production from natural gas plants increased by 103,000 barrels per day (bpd) from January 2013 to January 2014. Production in January 2015 was 182,000 bpd higher than January 2014. So in January, the year-to-year growth in propane supply was on a sharp uptrend.

It is worth noting that beginning in June, though propane supply was still increasing, the rate of growth in supply was slowing. For example, in June 2014, production was 159,000 bpd higher than it was in June 2013, but June 2015 production was only 138,000 bpd higher than it was in June 2014. That trend of slower growth in propane production from natural gas processing has continued since June.

We must remember that propane export capacity has been growing at a fast clip, so if propane supplies cannot match the growth in export capacity, it will have the long-term impact of tightening up domestic propane supplies/inventory, thus supporting higher prices.

During the January-through-October time frame, U.S. propane production from natural gas processing increased by an average of 158,000 bpd from 2014 to 2015. However, that was offset somewhat by a 23,000-bpd decrease in propane production from refineries. The net gain in propane production from January 2014 to October 2014 and January 2015 to October 2015 was 135,000 bpd. That is an increase of about 4.050 million barrels per month. U.S. propane exports increased by 5.567 million barrels per month during that same time frame.

Some of those exports were offset by a slight increase in imports of 120,000 barrels per month.

For the foreseeable future, propane production is likely to continue to increase but at a slower pace than it has been occurring over recent years. It appears that increases in exports and further increases in export capacity should be more than enough to offset the gains in production, given that declines in drilling activity have resulted in slower growth in propane production.

The data we used for this analysis was from January to October 2015, so it does not take into consideration the impacts of this year’s mild winter. However, with export growth exceeding production/import growth before winter started, one can easily conclude that had propane demand been more robust, propane inventory could have been on a steeper-than-normal decline this winter.

So far this winter, demand is 167,000 bpd, or about 5 million barrels per month, less than last winter. That is essentially equivalent to the year-to-year increases in exports that were seen before winter began. Had this winter’s demand matched last year’s level, propane inventory’s average rate of decline could have been about a million barrels higher per week.

Given the current trends in propane production, imports and exports, we must recognize that we could be in a much different pricing environment in a winter of more typical demand. This year’s winter has been affected by El Niño conditions, but we are seeing projections of La Niña conditions next winter.

Given the data shared here and the projections for a much harsher winter next year, we should be careful not to let current conditions lull us into a false sense of security concerning preparations for next winter and beyond.

For more Cost Management Solutions analysis of the energy market that helps propane retailers manage their supply sources and make informed purchasing decisions, visit www.lpgasmagazine.com/propane-price-insider/archives/.