With more than 9 billion gallons of propane delivered to U.S. customers each year, moving those volumes to their final destination is a complex task involving pipelines, rail cars, storage (be it underground or above ground) and, ultimately, trucks. Several major factors help determine the quantity and price of propane delivered to end-use customers, including the seasonality of demand versus the steady nature of production. In today’s RBN blog, we discuss highlights from our new Drill Down Report on propane.
Let’s start with the basics. Looking at the far left in Figure 1 below, propane is produced from the wellhead and is entrained in the natural gas stream. The NGL stream is separated at a gas processing plant into a liquid stream that is a mix of NGLs, also known as raw mix or Y-grade. The cold temperatures of the processing plant cause the propane and associated NGLs to “fall out” of the stream as a liquid. The raw mix is then piped to a fractionator, where it is separated into purity product streams. (The raw mix can also be placed in storage and kept underground until it is ready to be fractionated.) Following fractionation, propane is either stored until needed (this often occurs with propane fractionated in the summer months for use during winter demand) or it can be taken directly to the next step, which is transportation to a wholesaler. Propane from refineries is also picked up at this step and put largely on rail cars.
[RBN’s Propane Master Class, set for Thursday, November 13, will dive into the details of each topic included in our new Drill Down Report and introduce modeling techniques, pricing mechanisms and a lot more info on the production, midstream and export sides of the business. Registration’s not open yet but will be soon — CLICK HERE to join the waitlist and receive updates.]
Figure 1. Wholesale-to-Retail Propane Value Chain. Source: RBN
Wholesalers (middle section in Figure 1 above) — companies that sell propane to retailers — have four primary functions. The first is supply aggregation, which includes acquiring propane from multiple sources. This is usually done by midstream companies that operate fractionation facilities. It is also done by “pure” wholesalers that buy directly from fractionators and refineries, and refiners that produce propane as a byproduct. The second function is operating logistics networks to ensure the timely delivery of propane across regions. Many wholesalers maintain large fleets of propane transport trucks to handle long-haul deliveries to terminals. They also have railcars to handle long-distance transport to terminals, roughly 60% of propane terminals in the U.S. have rail capacity. The third function is product trading. Wholesale propane marketers engage in both physical trading and financial hedging. The fourth and final primary function is midstream integration and wholesale competition. Some wholesale propane marketers are midstream companies that own assets such as pipelines, fractionation facilities and terminals.
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