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.
Figure 1 (Click to Enlarge)
Growth in Diluent Demand
On the flip side, Canada seems to have an almost insatiable appetite for diluent to blend with Canadian bitumen to make pipeline transportation possible (see Like A Box of Chocolates – The Condensate Dilemma). As we’ve discussed in the RBN blogosphere many times, Canadian heavy crude oil (bitumen) is too viscous to be moved in pipelines without either putting it through an expensive upgrading unit or mixing it with diluent to – in effect – thin it out. About 40% of Canadian crude is blended with diluent (mostly natural gasoline or lease condensate) and that percentage is increasing. That will push Canadian demand for diluent above 600 Mb/d by 2018, with only about 150 Mb/d coming from Canadian sources. The rest will need to be imported from the U.S.
The Enbridge Southern Lights pipeline (see Fifty Shades of Eh) supplies most of that market today. But Cochin is a perfect contender to provide a big piece of the additional capacity required by Canadian bitumen producers. Kinder Morgan is spending about $260MM to reverse the 1,500 miles (and 25 pump stations) of the Cochin line to move diluent into the Alberta market. By July 2014, Cochin will move up to 95,000 bpd of diluent (lease condensates and natural gasoline) via a connection to the Explorer Pipeline in Kankakee County, Illinois to their existing terminal facilities near Fort Saskatchewan, Alberta. Kinder Morgan has already secured 10 year (minimum) commitments for essentially all of their capacity. Of course, this means taking Cochin out of propane service.
It’s a classic example of supply and demand. At the end of the day, product will move to the point where it is most in need. In this case, it’s smart business to fill Cochin 100% with diluent versus a declining volume of propane. It’s something that the Midwest propane markets have been and will continue to adapt to. Midwestern agriculture and heating demand which were original drivers to what was considered the foundation of the most advanced and leading edge pipeline and distribution infrastructure back in their day, including Cochin, is now faced with a new world.
The good news and the most fundamental to this new world is the fact that North America is officially long propane, and that length is coming from a new and once unpredicted source, the shale plays in neighboring North Dakota; and it’s just a tank car or truck delivery away. Canada also has more propane lately, and even though a lot of it previously came down Cochin, it too is (and always has been) just a tank car delivery away.
What Happens When Cochin Goes Away?
We showed a version of Figure #2 below last time. In this version we’ve faded the Cochin route into the background, effectively showing what the propane distribution infrastructure in the four primary corn drying and heating states looks like without Cochin. With the exception of southern Minnesota, it’s all about truck, rail and storage – old and new. It’s also about some new and not so new players who have been gearing up for this very thing including veterans who have been in the propane business for a long time; Hess, CHS Inc. (the big agribusiness co-op), Enterprise, NGL Supply (NGL Energy Partners) and others. We’ll talk more about these players later.
Figure 2 (Click to Enarge)
As indicated by the green arrows on Figure #2, when Cochin goes away, all of the propane demand in the region will be satisfied by rail and truck from Bakken/Canada/Rockies and pipeline supplies from Conway, KS. The big growth area will be the Bakken which will see increasing supplies moving by rail and truck into the Midwest market. Those volumes will be supplemented by rail volumes from the Canadian market (volumes that formerly would have moved on Cochin) and pipeline volumes from the #2 natural gas liquids hub in the U.S. at Conway, KS.
Clearly the most significant factor in this market will be supplies from the Bakken. Figure #3 below shows our expectations for PADD 2 propane supplies over the next few years, up from about 250 Mb/d today to almost 400 Mb/d in 2018. Unfortunately for those of us who try to follow NGL supply/demand statistics, PADD 2 (the EIA geographic area covering the Midwest) includes three different areas of major NGL supply growth – the Bakken, the Oklahoma/Kansas region and way up in Ohio (encompassing the Utica play). To keep things a little more understandable we have carved Utica out of these numbers. The main point is that a big chunk of the growth in PADD 2 propane will be coming from the Bakken in North Dakota and a lot of these barrels will find their way by rail into the Midwest market. Given the relative short distances, trucks will also play an important role. These volumes will move to all those terminals – all of which have some storage capacity – shown in Figure #2.
Figure 3 (Click to Enlarge)
So where is the rest of Midwest propane supply going to come from? Our guess is that for the next few years a lot will come on rail from Canada. If you look at the price history (Figure #4 below), the price at the major Canadian NGL hub at Edmonton, AB is usually well below the price at Conway, KS. In fact, the Edmonton price is usually low enough to lay propane into the Midwest at prices cheaper than pipeline supplies coming in from Conway. Lately that has not been the case as Edmonton prices have strengthened along with all propane prices responding to big Gulf Coast exports and the corn drying crisis, but we expect that Edmonton will move back down to its more typical level under Conway, especially as Conway propane gets sucked down to Mont Belvieu to be exported to world markets (see She Don’t Lie, She Don’t Lie, Propane. Exports Take Off.)
Figure 4 (Click to Enlarge)
The bottom line in all of this is that future propane demand in the Midwest will be met mostly by rail. It is one more manifestation of the mega-trend of moving liquid hydrocarbons by rail in the new World of Shale. In the next installment of this series we will look at what midstream companies and other players in the Midwest are doing to build out the necessary infrastructure to take care of all of this propane-by-rail (RBR) supply and where there may be opportunities for the industry to do more.
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