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Farmer Dries Corn and I Do Care; Propane Corn Drying, Shortages and the Cochin Reversal – Part 2

The northern corn-belt states are winding down from a very wet bumper crop of corn which has required a lot of grain drying, fired by propane.  That has translated into a shortage of propane supplies – so much so that seven governors recently issued emergency orders to expedite propane deliveries to their states.  Now, with about three weeks left before the official onset of winter (and it feels like winter already), 2013 Midwestern propane problems should be behind us.  But what about next year?  In 2014, Cochin pipeline – one of the most significant traditional sources of propane for the region goes away.  Kinder Morgan (current owner and operator of Cochin) is reversing the system and turning it into a diluent pipeline.  Volumes of propane previously delivered by Cochin must come from somewhere else.  Today we’ll continue our series looking at upper Midwest propane and how the region is likely to adjust in the post-Cochin market.

Recap from Part 1

In Part 1 of this Farmer Dries Corn and I do Care series we looked at the reasons propane use for corn drying spiked this year, where propane for the Midwestern corn belt usually comes from, what has happened to propane prices lately, and mentioned the fact that Cochin is being reversed.  This time we’ll get into the details of what that reversal could mean.   Cochin has traditionally been a big player in this market.  The 12-inch pipeline runs 1,900 miles between Fort Saskatchewan, Alberta and Windsor, Ontario, cutting through the U.S Midwest on the way.  It can be operated as a batched system, but in recent years it has moved mostly propane into Midwestern terminals.  Capacity is about 70 Mb/d. 

Shrinking Throughput but Big Propane Demand Swings

Figure #1 below provides half of the story of why Kinder Morgan is reversing the system.  Canadian volumes being imported on the pipeline have been falling for years.  Back in the 2000s, Cochin was moving 40-50 Mb/d, or about 60% of capacity, sometimes spiking up to 60 Mb/d.  But that started to fall off in the late 2000s, even though the pipeline would still see some big spikes in utilization during the winter.  Meeting demand on those big spikey demand days may be good for the market, but is not so good for your pipeline economics when average utilization of your pipeline is getting down below 35%.  Then starting early in this decade, the Midwest started getting more propane from that big source of hydrocarbon production right next door – the Bakken, and pipeline utilization fell to only 22%.  It’s hard to make money with a pipeline when capacity utilization is that low, so Kinder Morgan certainly has had the motivation to repurpose this asset.   Note though, that the pipeline still has spikes of throughput in the corn drying and winter heating seasons.

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