Is there enough propane?

In my cross-country travels as NPGA chairman, I have learned of a broadly held industry concern regarding long-term propane supply availability.

I’ve heard any number of logical reasons for this concern, most rooted in the new energy commodity price relationships and all of the widely publicized energy production issues – natural gas shale production, for example.

I want to address these changes and the broader supply availability concern – which I think is unfounded – and hopefully prompt a larger debate on the matter. First, I present the 2010 global supply and demand information for propane, courtesy of Purvin & Gertz:

To clarify, 2010 propane production in the U.S. was estimated at 19.2 billion gallons, of which 10.2 billion was sold to residential, farm, industrial, commercial and autogas consumers. World propane production for 2010 was estimated at 70 billion gallons, of which roughly 50 billion gallons were sold to the same market segments.

An abbreviated summary of global supply and demand follows:

1. Annual world propane sales equal annual propane production, plus or minus a minimal amount of storage carryover balances.

2. The world propane supply/demand is balanced by swing buyers, who are highly price sensitive and have alternatives to using propane.

3. The petrochemical industry is the swing buyer for propane. Because that industry is highly price sensitive, petchem companies select propane from a slate of other hydrocarbons for feedstock and essentially absorb excess annual propane supply.

4. While global energy production and demand are remarkably dynamic, the first three rules about world LP gas production and sales remain fundamentally correct.

Now let me tackle some of the basis for the concerns, hopefully to refute most as myths and to help you become more confident about our long-term supply of world and domestic propane.

■ Myth #1: The current high price of wholesale propane means that the supply must be tight and/or short. Fact: While spot market prices are $1.50 at Mt. Belvieu, the world is willing to pay more for propane.

■ Myth #2: The new price relationship of propane to crude and natural gas means that we must be short of propane supply. Fact: Propane production is on the uptick and expected to grow primarily because of the increased U.S. shale gas production.

■ Myth #3: Current domestic propane inventory levels are below historic averages, so we must be short of supply. Fact: Inventory levels are low principally because U.S. propane exports are on a record pace due to the strong global propane market. Inventory levels are essentially irrelevant to the long-term availability of propane.

■ Myth #4: Despite increased propane production from growing natural gas shale production, propane prices remain high relative to natural gas. Therefore, we must be running short of supply. Fact: Natural gas prices are low because of the rapidly growing shale production and the limited ability of our current infrastructure to export natural gas to stronger world markets.

I consider this concern in our supply availability a critical issue for the industry. For example, do we really want to communicate to our customers, employees or constituents that there may be some question about the future availability of the very product we sell?

This industry has a number of challenges – and a great set of possibilities and opportunities – but the availability of propane is not one that should worry us. I urge you to conduct your own research and also consider attending one of the next excellent propane supply seminars conducted by NPGA’s International Committee.