Most of the increase in U.S. propane production in recent years has come from plants processing natural gas to extract natural gas liquids (NGLs). The rich (wet) gas those plants process is either produced with crude as associated gas or from wet gas wells that target NGLs. In either case propane supplies are produced regardless of U.S. demand – and that demand is relatively static although subject to significant weather related seasonal variation. There are two important consequences of this supply/demand imbalance with important implications for the propane market. First, the U.S. can produce about twice the propane it needs, so the surplus must be exported. Second, most production growth is next door to the largest propane demand regions in the country. Today we describe the scenarios used to build our model of propane supply and demand used to analyze these developments.
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 propane market developments that could cause disruptions similar to those that occurred in the winter of 2013-14 when A Perfect Storm left Midwest stockpiles empty, farmers without propane to dry crops and prices pushed through the roof by freezing Polar Vortex temperatures. 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 the second episode in the series. Episode 1 provided 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 75% 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. But all this growth in propane supplies could not prevent a combination of distribution constraints, low inventories and extreme demand causing A Perfect Storm of shortage and price spikes two years ago in the winter of 2013-14. RBN’s analysis for PERC sought to understand changes to the propane market since that disruptive winter 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. The model forecasts propane supply and demand out to 2025 based on different supply and demand scenarios. This time we review the scenarios behind the model.
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Supply Scenarios
About two-thirds of current U.S. propane production comes from natural gas processing with the balance from refineries. But as noted above, essentially all of the growth over the past few years has come from the gas processing side. The surge in volume processed by these plants has resulted from increased production of (a) high-BTU associated gas from crude oil wells, and (b) ‘wet’ gas targeted by producers for its high content of NGLs. But the continued expansion of both crude and NGL production has been called into question by drilling cutbacks following the crude price crash that began in July 2014 and has impacted NGL prices as well – including propane. Although U.S. crude production has continued to increase in the lower price environment it has leveled off and drilling rig counts are down sharply. Our model assumption is that propane supply is strongly influenced by crude prices. If crude prices are higher, then it is likely that NGLs will also be higher. Thus more wells targeting crude and NGLs will be drilled, more wet/associated gas will result and propane supply from gas processing will increase. Conversely, if crude prices are lower then drilling activity will be curtailed and propane production will be reduced accordingly. However, crude oil prices are notoriously difficult to predict given the influence of international political, economic and market events. In order to deal with uncertainty in crude prices our model analysis is based on two different crude oil price scenarios.
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