With increasing production near demand regions, better connectivity from both pipeline and rail, and export volumes that can be bid away from global markets, the U.S. propane industry is in a much better position to handle a “Perfect Storm” of extreme demand events than it was in the winter of 2013-14. Nevertheless, today’s propane market brings with it a number of challenges, including greater exposure of domestic propane to global markets, more complex inter-regional supply dynamics, a more diverse supply chain, all in the context of limited domestic demand growth. In today’s blog we conclude our analysis of the U.S. propane market.
This blog and others in the series are based on an analysis recently completed by RBN for the Propane Education and Research Council (PERC). PERC engaged RBN to assess market developments that could impact the prospects of disruptions similar to the one that occurred in the Perfect Storm winter of 2013-14, and to suggest actions that could alleviate the risk of such market turmoil. The project was completed in August and with the permission of PERC, this blog series summarizes some of RBN’s analysis and conclusions.
This is episode eight in the series. Episode 1 provides an overview and introduction to the analysis – beginning with the dramatic increase in propane production over the past 7 years. Total U.S. propane output has increased by nearly 70% from an average of 0.8 MMb/d in 2008 to 1.4 MMb/d during the 1st half of 2015. Most of that growth has been driven by production from gas processing plants that has more than doubled from 0.5 MMb/d in 2008 to 1.1 MMb/d in 2015. The overall growth in propane has outpaced domestic demand such that as much as 50% of the total is now exported to balance the market – even as inventories are at all time high levels. RBN’s analysis for PERC sought to understand changes to the propane market since the disruptive winter of 2013-14 as well as how susceptible today’s market is to similar events and what actions should be taken to reduce the risk of it happening again. Our approach to the analysis involved developing a monthly model of U.S. propane supply, demand, logistics and pricing at the PADD (Petroleum Administration District for Defense) level using historic propane market data and then integrating that model with RBN’s forecasts of supply and demand. In Episode 2 we outlined supply and demand scenarios for the model based on oil price “Growth” and “Contraction” Scenarios as well as “Normal” and “Severe” weather patterns. Episode 3 took a closer look at propane production by PADD region – noting the dramatic growth in the Northeast as well as the Midwest. Episode 4 detailed regional historic and future projected propane demand by PADD and Episode 5 looked at the main domestic propane demand sectors. Episode 6 highlighted how new infrastructure improved propane market interregional connectivity. Episode 7 showed how that better connectivity from both pipeline and rail, in conjunction with export volumes that can be bid away from global markets, has significantly improved the U.S. propane industry’s ability to respond to severe weather events. This time we conclude our analysis by looking at the implications of all these market changes for propane market participants, particularly retail propane distributors and marketers.
A Market Better Able to Respond but Not Without Challenges
The culmination of advances in propane infrastructure that we discussed in Episode 6 is that the U.S. propane market is much more interconnected that it was just a few years ago. New processing plants and fractionators provide propane supplies closer to some of the largest demand regions of the country. New pipelines better connect different regions of the nation, so shortages in one region can be more easily alleviated by other regions. In cases where pipeline capacity is unavailable or inadequate to handle new production, rail provides additional flexibility of moving supplies to areas where demand is peaking. In the same way, new storage and terminaling facilities improve flexibility and increase local capacity in key demand regions.