Supply disruptions, price spikes deliver tight, tough winter heating season

April 21, 2014 By and    

As the term polar vortex entered the nation’s lexicon, many propane providers and their customers were wishing a pox on Pax and all other winter storms that put such a crimp on the LP gas supply chain while sending spiking prices through the snow-covered roof.

Houses engulfed by bitter cold temperatures creaked and groaned, forcing propane furnaces to work overtime along with the marketers who were pulling out all of the stops to keep gas flowing.Rural-fill_62_700

“I’ve been in the propane industry for my entire life, and this is the longest and coldest season I’ve ever experienced – and it’s still going on,” says D.D. Alexander, president of Global Gas Inc.

St. Patrick’s Day came and went with few signs of the green announcing spring was indeed bouncing back to finally conclude a stress-filled heating season, which started going south during an especially fertile fall crop drying load.

“For a lot of people, that hit hard, then the weather got bad and heating demand hit, and you had significant problems with the pipelines,” says Bill Van Hoy, executive director of the Texas Propane Gas Association.

Texas escaped the supply shortages that so many other states experienced, yet it still felt the sting of volatile price bites and endured long waits at the terminals.

“The wholesale prices increased somewhat proportional to supply and demand. There were price spikes, but it was very erratic. It was unusual to see these swings on a daily basis,” says Van Hoy, describing a rapid-fire pattern of wholesale cost shifts of up to 40 cents.

In late January, the U.S. Energy Information Administration (EIA) reported a record American average price for propane at $4.01 per gallon.

With all of the shale production in play, many thought the industry would be awash in propane. It was not to be.

“We had a 41-million-barrel increase in propane production, but all of that was offset by increases in propane exports and petrochemical consumption,” says consultant Mark Rachal at Cost Management Solutions. “Between those two things, we took up all of the extra production, and then we had a high-demand winter and crop drying season.”

Marty Lerum, a principal at Propane Resources, cites a litany of converging concerns that caused the problems. This included a scarcity of available transports and railcars, record-busting thermometer readings and other climatological calamities coupled with an invigorated domestic well-drilling industry that has diverted critical resources.

“The distribution system is in a period of transition, and the distribution system broke down; you had the Titanic hitting the iceberg,” Lerum says. “People were running out of propane because there were not enough trucks. They were designed to run 50 miles, and we were asking them to run 400 miles.”

Regulatory relief
The propane industry’s strong association affiliations at the national and state levels are receiving accolades for their work in easing some of the trials and tribulations that marketers faced throughout the heating season.

Debra Grooms of the Iowa Propane Gas Association made four visits to the statehouse in Des Moines to meet with officials at the executive and legislative branches.

“We were up-front,” Grooms says. “They wanted to know why there was a shortage and why the prices were so high, and we gave them updates on what was going on.”

In Oklahoma, there were fears about supplies being threatened and people running out of propane, says Richard Hess, the executive director of the Oklahoma Propane Gas Association.

Critical aid from Gov. Mary Fallin and other regulatory officials in the form of hours-of-service (HOS) relief and other emergency waivers brought a welcome respite as stocks became tighter and tighter.

“Everyone has acted responsibly; we have a good relationship with the governor and she trusts what we tell her,” Hess says.

Industry outreach and the resulting cooperative stance from government officials in Charleston, W.Va., and other nearby state capitals created a smoother route for transports traveling long distances. In addition to state HOS waivers, the Federal Motor Carrier Safety Administration granted unprecedented regional exemptions for the East, Midwest, South and West, covering as many as 35 states this winter.

“With this repeated snow and icing, the regional HOS waiver was so helpful,” says Tom Osina, executive director of the West Virginia Propane Gas Association (WVPGA). “They were all able to abide by the same waiver” without having to take into account different rules for each state.

Osina, like other state association leaders, was also busy working the phones to keep reporters abreast of the unfolding situations in the industry.

“There were concerns about price,” he says, “and by talking to those media outlets we were able to get out the message about what was going on regionally and nationally.”

Joe Rose at the Propane Gas Association of New England (PGANE) was especially instrumental in resolving the various issues impacting the Northeast, according to Alexander at Global Gas.

“It became pretty clear in November that we were going to have a problem,” Rose says. “The marketers stepped up and bought propane off ships.”

Alexander describes how retailers resorted to short filling customers – some because of the supply shortage, while others got less than a tank load because they lacked the funds or credit to pay for it.

“Some marketers would give their customers a choice [about whether to short fill to save money or pay for a full load],” she says.

Some marketers, in turn, had diminished cash flow and credit shortfalls with their suppliers.

“When the market blows out like it did, there’s a blowout on the credit,” Alexander says.

Matters in the Midwest
Scot Imus, executive director of the Indiana Propane Gas Association, says there were times when members would run out of propane, and other marketers would step in and fill tanks.

“People were serving other accounts and returning the favor,” he says. “They all suffered the same crisis, so they helped each other out – the industry worked together.”

Competitors were assisting one another in Iowa as well, according to Grooms. Transport loads were shared to prevent their colleagues from approaching empty.

“They were also trying to help consumers with the price by short filling, which cost the marketers a lot of money,” she says.

John Tibbs, executive director of the Illinois Propane Gas Association, prefers to avoid the term “propane shortage” – “the gas just wasn’t in the right places,” he says.

“We had trucks going to Texas, Mississippi, Missouri and Kansas,” Tibbs adds. “Your freight cost is going to be higher. Some went ahead and ate some of it, but it worked out in the end.”

The marketers communicated with their customers to conserve, he says, adding that “it was touch and go a couple of times, but we had enough propane.”

Minnesota was 13 percent colder than normal and 15 percent colder than last year. High demand made product tough to come by in the region, says Minnesota Propane Association Executive Director Roger Leider.

“We’re moving a lot of product in March and we have a long way to go,” he says. “A lot of people held back because of the pricing, so there will probably be a lot of spring filling going on. Customers are saying, ‘At $4 propane, maybe give me a half fill – enough to get by.’”

Trickle-down effect in West
Baron Glassgow, who serves as executive director for several western propane associations, says some places drew assets from the West.

“Even places that didn’t have much of a winter had problems. We had railcars that were running three weeks behind,” Glassgow says.

A retailer in Oregon was especially concerned over the delayed railroad activity and the negative impact it had on his stocks.

“If he doesn’t get the railcars, he’s got to get a transport, and the terminals, drivers and transports are already busy. It causes chaos,” Glassgow says.

Pricing was higher, particularly in the mountain states, causing marketers to make shorter deliveries, he adds.

“Out west we did not have the supply struggles they had back east,” says Don Dockstader, vice president of wholesale operations for AePEX Energy, based in Templeton, Calif. “We didn’t have any issues at all this year, but we had a bit of a scramble in December with an early freeze.”

Few marketers were venturing to California to augment dwindling stocks.

“That trip is a little too far for them,” Dockstader says. “Not many marketers made it to California, but I know a few of them made it to the Arizona market.”

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