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Trader's Corner

This week’s Trader’s Corner is going to discuss how supply challenges will still be present next winter.

On April 18, 1942, during the early stages of World War II, the U.S. military launched a daring bombing raid on Tokyo in an effort to boost American morale. It was known as the Doolittle Raid for its commander Lieutenant Colonel Jimmy Doolittle. The raid was unorthodox in that the Army’s B-25B Mitchell medium bombers, normally land-based aircraft that needed a long, conventional runway to take off, were launched from the naval aircraft carrier USS Hornet.

The Hornet secretly tried to move into position close enough for the bombers to take off on a one-way mission to hit military targets in and around Tokyo with the expectation the bombers would land in China after completing the mission. The Hornet was detected by Japanese naval patrols and had to launch the Mitchells early. All but one of the bombers managed to attack their selected targets, but because of the early takeoff, all had to crash-land before reaching the airfields in China.

President Franklin Delano Roosevelt had pushed for a bombing raid against Japan to try and help boost American morale, which was at an extremely low level after the losses at Pearl Harbor on Dec. 7, 1941, and because of other losses at the hands of the Japanese army and navy in early 1942. Though the destruction caused by the bombing raid was minimal, it had the intended impact of boosting morale at home and among U.S. military forces. When an excited press asked President Roosevelt from where these land-based bombers attacked, he replied that they had flown from a secret U.S. base called Shangri-La.

The word Shangri-La was used in a 1933 novel by British author James Hilton in describing a mystical and harmonious valley. Shangri-La has become synonymous with any earthly paradise, a permanently happy land, isolated from the outside world. Roosevelt was a fan of Hilton and it was from his book he borrowed Shangri-La.

During this past winter, from a physical supply standpoint, the U.S. propane industry suffered through a Pearl Harbor-like winter. We were all surprised by the impact that recent infrastructures changes had on the ability to get supply to consumers in the first place, and in the second the devastating impact it had on prices. There was a lot of anger coming out of winter from retailers and consumers. That anger is mostly becoming replaced by fear of what will happen in the future.

Like the American public before the Doolittle Raid, our industry needs a morale boost. We need to know if our ability to get wet barrels into our bulk storage tank this year will be any easier than last year. We need to know this enemy can be defeated. We could tell by the questions following our presentation at a recent propane convention that folks wanted someone to reassure them that last winter will not be repeated.

We want to be told about Shangri-La, a secret source of propane that will eliminate all the problems we faced this past year. Oh, how we wish we could share with you today that we have found the propane supply version of Shangri-La. A network of massive 36-inch pipelines heretofore undiscovered under all the high propane demand areas of our country, where pristine fuel-grade propane flows like the great rivers of the world at flood stage.

Alas, we have not made such a discovery. Although there is plenty of propane production in the U.S. (and there is likely to be even more this coming year), it appears for now some of the same issues of getting it where it needs to be remain. Of course, there will be no problems if there is no winter or crop drying demand, but we certainly can’t imagine anyone in this industry wishing for that to happen. We want another high-demand winter just like this year without all the supply logistics issues.

Since Shangri-La still hasn’t been discovered, we will have to count on the market making adjustments like it has historically to prevent a repeat of this past winter. Every propane consumer, retailer and wholesaler will be looking for ways to avoid the supply issues of last year and they will find some answers.

Still, we must recognize that the TEPPCO 16-inch line that was taken out of propane service and was not available this past winter will still be in ethane service going forward. The lack of that asset was a key cog in the infrastructure issues we faced this past year. We also know the Cochin line will not be available for propane service going forward.

As of right now, we don’t know of any changes that have resolved the issue of getting seaborne cargos from the Gulf Coast to the East Coast. The Jones Act that prevents non-U.S. flagged ships from going directly between U.S. ports has not been modified. If we had the ability to move significant cargoes by sea directly from the Gulf Coast to the East Coast it could significantly offset the loss of the TEPPCO 16-inch line.

We also know there are no laws limiting propane exports, so the amount of exports will be controlled by free-market forces. Currently, the price of U.S. propane is low enough to encourage exports.

But while we haven’t discovered Shangri-La, we do know of a couple of changes that could alter conditions between this year and next winter. We will share those and we hope to be able to share more as the summer progresses to help alleviate fear and build morale.

We do not have any illusion that what we are about to share is enough to alleviate logistical supply issues. What we hope is they, along with many other small changes that will be made as we prepare for next winter, will be enough to manifest a different outcome if propane infrastructure is once again tested.

MarkWest has added another fractionator in the Marcellus/Utica Shale that will make more propane available in that region next year. The new fractionator at its Hopedale, Ohio, complex came on line in January and has 60,000 bpd of propane plus capacity. This doubled MarkWest’s capacity in the region. The product will be marketed by truck and rail, but as far as we know, little if any will be stored for winter. That means the summer/winter ratio will likely be one to one.

Still, it is more supply that is not dependent on infrastructure from Mont Belvieu to get into a demand area. MarkWest will add another 10,000 bpd of fractionation later this year, bringing their total to 130,000 bpd (90,000 more than this winter). The bulk of the output should be propane.

The other change is on the demand side. Westlake Chemical will change feedstock at its Calvert City, Ky., plant. The ethylene plant, which makes PVC pipe and other products, has just changed to ethane rather than propane as its feedstock.

Before the conversion, the propane for Westlake Calvert City was delivered on the 24-inch TEPPCO line that remains in multi-products service that includes propane. This 24-inch line is the one that propane retailers were dependent on this winter from the TEPPCO system with the 16-inch line having already been taken out of propane service.

Westlake used to ship about 10,000 to 15,000 bpd of propane on the 24-inch TEPPCO from Mont Belvieu. Now it will be taking ethane off the reversed 16-inch line that is heading to Mont Belvieu from Marcellus/Utica. With purity ethane running about 25.5 cents per gallon, other petrochemicals with the option may opt for a similar conversion, though the products they need to yield will determine whether that is possible.

Obviously, if petrochemicals reduce or at least limit their consumption of all the new propane production, it could greatly help with the amount of propane supply that is left for the retail/commercial sector.

However, from an infrastructure standpoint, does the 10,000 to 15,000 bpd of capacity that is freed up on the 24-inch TEPPCO line make a difference in getting Gulf Coast propane to Midwest and East Coast markets?

In theory, yes. Propane shippers have as good a chance of accessing this available capacity as any other product we would think. Remember, this is a multi-product pipeline so shippers of other products can use the capacity as well. There is a good chance that some of the capacity could be taken by condensate shippers trying to get product to Canada, for example.

Of course, Enterprise and shippers on its TEPPCO 24-inch will be in a better position to explain if this change will make a difference on the amount of propane the line may be able to deliver to propane retailers this coming winter.

We hope that a multitude of small changes like these, and better preparation gained from the knowledge of this year, will avoid a repeat of this past year even if we have a strong demand winter.

Our key points are to encourage you to be prepared for a repeat and hope it doesn’t happen. And that you should not expect an announcement about Shangri-La. Instead, focus on what you can control and hope that if we all do, the supply issues of 2013-14 will not be repeated. For most of us that may not be Shangri-La, but it would be close enough for the next couple of years.

The long-term hope is that producers/processors will build enough propane fractionation capability at shale gas production fields located close enough to high demand markets to meet winter needs. They would have all that retail propane marketers need in the winter, while using available pipelines to move summer excess to export and petrochemical markets. Essentially, it is the reverse of the current infrastructure/supply situation. If that were to happen, it would be very close to propane Shangri-La.

Until then, it looks like retailers should consider adding more storage and doing everything they can to gain more control over customer tanks. We may have to change the way we sell to customers to achieve this, but it is a worthwhile objective. We need tanks filled going into winter. Beyond that, we will have to look to rail or expect to travel a long way to get supply in high-demand situations until more fractionation takes place in high propane demand areas.

In 1942, President Roosevelt asked his military to do something they initially told him was impossible. Yet in just a few months, the daring mission was carried out. It may take the same type of out-of-box thinking, innovation, daring and courage by propane retailers to address potential supply threats this year, but we know you have the right stuff.

Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at
Propane prices gained some upward momentum as more buyers stepped into the market to cover next winter needs. We will go into this week bullish on the prospects for that buying to continue.

Monday: There was little movement in propane prices with the upward momentum from the previous week slowed. Crude was also unenthusiastic to start the week.

Tuesday: Propane prices remained flat with both hubs unchanged on the day. WTI crude fell below $100 as the U.S. and Russia agreed a diplomatic solution was needed for tensions resulting from Russia’s annexing of the Crimea region of the Ukraine.

Wednesday: A higher than average inventory build for week 13 of the year kept propane prices subdued. News that Libyan rebels could reach an agreement with the central government to open crude export facilities were enough to keep a decline in U.S. crude stocks from pushing prices higher.

Thursday: Propane finally broke out of its doldrums as more buyers saw the current price of propane as a buying opportunity. A sharp jump in the price that Russia will charge Ukraine for natural gas lifted energy markets in general.

Friday: Propane prices continued to advance on good demand as buyers took more winter positions and crude gained. Crude was up as Ukraine began emergency talks with neighbors to try and acquire more natural gas from them to avoid having to pay Russia’s high price.

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