It’s on. Alliance Midstream LLC’s Benson, Minn. rail terminal will be up and running late this month, in time for crop drying and the heating season while adding critical infrastructure in the Upper Midwest. The firm is building out the terminal, formerly owned by Kinder Morgan Energy Partners and served by the Cochin pipeline, to be a rail-in, truck-out facility capable of unloading 32 railcars and loading 130 trucks a day. In operation since 1979, the 13-acre site currently provides about 1.4 MMgal. of storage in 17 above-ground tanks. And the storage is full and ready for winter.
With the Army Corps of Engineers issuing the final permit in late July, the next day construction crews were making the dirt fly at the west-central Minnesota location. Benson will be exclusively marketed by Alliance Midstream’s affiliated wholesale company, Alliance Energy Services LLC (North Kansas City. Mo.). In mid-July Alliance Energy hosted a launching ceremony at the terminal, purchased from Kinder Morgan for $5.1 million. Alliance is investing another $6 million for facility infrastructure and the rail link. The terminal initially will be able to accommodate 64 railcars, with propane primarily sourced from Canadian suppliers and smaller volumes coming from the new production areas of North Dakota. Sixteen railcars will be able to be unloaded at a time.
No More Cochin
In the spring of this year the industry lost more than 50,000 bbld of propane transportation capacity from Alberta into the propane market in the U.S. Midwest when the Cochin pipeline was switched to diluent service. As reported by ICF International in a report released in August, in 2013 the Cochin was the largest single source of propane supply into North Dakota (29%) and Minnesota (38%), and a major source of supply into Iowa (13%) and Indiana (17%). While the pipeline had no terminals in Wisconsin, many marketers in the southern half of the state relied on Cochin deliveries into Minnesota.
The study, “Impact of the Cochin Pipeline Reversal on Consumer Propane Markets in the Midwest,” further notes that the line provided direct access to the 5.2 MMbbl (220 MMgal.) of propane storage facilities near Fort Saskatchewan, Alta., Canada. That access to major storage enabled the Cochin to be an effective source of swing supply into the Cochin market region, which ICF International identifies as the five states named previously, as well as the greater Cochin market region. This allowed the market to accommodate extreme swings in demand associated with grain drying and weather. In the absence of the pipeline, access to this capacity by Midwest propane marketers is limited to rail and truck transportation. In addition, the Cochin reduced transportation congestion on other pipelines delivering propane into the Midwest and provided flexible supply to meet demand needs throughout the Upper Midwest.
The Cochin runs from Fort Saskatchewan through the U.S. Midwest to the petrochemical complex in Sarnia, Ont. In the past, the pipeline was used primarily to transport propane produced in the Western Canadian Sedimentary Basin into the Upper Midwest to meet seasonal demand. Between 2008 and 2012, flows on the Cochin averaged less than 25% of operational capacity, leading the owner, Kinder Morgan, to evaluate options for maximizing the pipeline’s value. In 2012, Kinder Morgan requested approval from Canada’s National Energy Board and the Federal Energy Regulatory Commission to allow the pipeline to transport diluent from the Midwest to Alberta. Diluent is used to dilute heavy oil, such as that from the Alberta oil sands, to facilitate transportation on pipelines and by rail. Approval was granted by both agencies in 2013, and the line was taken out of propane service in the spring of 2014. Over the past year, Kinder Morgan worked on the Cochin line in preparation of this change. This resulted in propane outages and a reduction in shipping capacity, which greatly contributed to the propane crisis of last season.
“Now that the Cochin has ceased the shipment of propane from Canada into the U.S., our industry has a large void in distribution,” comments Jason Doyle, founder and president of Alliance Energy Services. “The area that will be most affected will be the Upper Midwest, and Minnesota is ground zero since it relied on approximately 40% of its propane supply from the pipeline. Supplying the market during peak demand periods will be very challenging. The industry must work together, more than ever, to plan and adjust to these distribution challenges.”
He added that suppliers are adding capacity, such as the Benson rail terminal, to help provide supply security, but unfortunately, in the short term this will not be enough to displace what was lost. “Carriers are adding trucks for more capacity and longer runs to alternative supply points. Railroads are committing to move additional capacity, although they are challenged with increased traffic from other industries. Retail marketers are adding storage and working their plans to ensure tanks are full and that they are routing their deliveries as efficiently as possible,” he says.
Noting that Benson was the first significant acquisition for Alliance Midstream, a company formed to own, operate, acquire, and develop midstream assets, Doyle acknowledges that the loss of Cochin-supplied propane has left a hole in the market that is much larger than a single new rail terminal can fill. “We definitely will be continuing to acquire strategic assets to help fill this supply void in the marketplace for our customers. Other wholesale propane marketers are also expanding rail operations and exploring new storage options. Together, as an industry, I am confident that we will establish the supply solutions that the market requires.”
As part of that needed infrastructure build, Alliance has purchased additional land around the Benson site and has expansion plans to add more track in order to facilitate more railcars. There is also the opportunity to add more storage, although track expansion is the priority. “The facility will be equipped to handle unit trains in the future,” Doyle says. “Currently the industry is not set up well for unit-train deliveries due to limitations at propane loading facilities, coupled with production areas being so spread out. Storage in railcars at Benson is an option that can help during peak periods, but the goal now is to unload quickly into storage and send the cars back to supply points for reloading as fast as possible.”
While working to bring Benson online, Alliance Midstream is simultaneously working with third-party owners of other rail terminals in order to transport more propane into the region. “We are talking with some customers and partners about utilizing their terminals more efficiently by moving higher volumes than they have in the past, as well as partnering to expand them to handle additional volumes,” Doyle says. Meanwhile, some supply contracts are in place at Benson, and the company continues to add new customers. “Our primary objective is to continue to supply the existing businesses in the area who relied on supply from the Benson terminal in the past,” the Alliance Energy president explains.
Game Has Changed
Looking at the relatively new propane export picture, the result of ramped-up natural gas production that has created an excess of propane and other natural gas liquids the domestic market can’t presently use, Doyle comments that propane must be exported since there isn’t enough demand or storage locations to take it all. While acknowledging that the export situation is a double-edged sword, and that many have strong feelings on the subject, with production forecast to grow still further, exports are here to stay.
“If we can create more storage infrastructure, especially in areas of the country with high demand that are farthest from the traditional propane hubs, that would be ideal and would improve fall and winter supply security. At the same time marketers can build a plan with hedges in place to alleviate some of the price swings that are inevitable now that we are influenced by export economics and international demand,” he says.
He adds that having a plan in place to enhance supply security and manage price risk is more important now than ever before. “Supply is growing at an amazing pace in the U.S., so that is a good thing. Distribution channels and infrastructure are lagging behind, creating short-term volatility and anxiety for many. We are confident that the industry is working hard to solve these issues and will get the job done. Things won’t happen as fast as we want, but things are happening every day to make the necessary adjustments. The seasonality of propane demand is part of the problem as we compete for transportation assets, but that is the reality of our business.”
Furthermore, beyond protecting the propane end user, Doyle emphasizes that the need for a comprehensive supply plan, along with a price risk management plan, is key so retail marketers can best manage their businesses. “To be proactive with a plan, filled with contingencies, is always recommended. In these markets, with all the changes that are taking place in supply and infrastructure, this is critical. The price swings that are a direct result of these infrastructure changes, such as what we experienced last season, will likely continue over the next few years. Hopefully, we won’t see a repeat of last year since that kind of supply shortage and the resulting price spikes are bad for consumers and our industry.”
ICF International’s report, prepared for the Propane Education & Research Council, underscores that the loss of the Cochin pipeline will not have a noticeable impact on the total supply of propane available to the North American market. Canadian supply formerly transported to the Midwest on the line will continue to be available to the broader market, and supply from Canada, the Bakken formation in North Dakota, and other regions will continue to grow. However, the loss of the pipeline will significantly reduce the availability of supply into the Heartland. As such, the loss of the Cochin is a transportation issue, rather than a supply issue.
ICF anticipates that some of the decline in propane supplied by the Cochin will be replaced by production from the Bakken and delivered by rail and truck. In addition, the consultancy notes that propane production in the Marcellus and Utica plays is also growing, which is increasing supply to the northeast and providing an alternative source of supply for the central Canadian petrochemical complex in Sarnia. In addition, ICF forecasts that Canadian propane formerly transported on the Cochin will continue to find markets in the U.S. Much of this supply will be available for shipment to the Midwest by rail.
However, substitution of the pipeline also requires replacement of the flexibility it provided, operating as it did as a system with the storage capacity in Fort Saskatchewan. There are no large scale storage facilities located in the Cochin market region, or in the Bakken, and access to storage facilities in the other producing regions is currently limited during peak demand periods by a lack of pipeline capacity. ICF concludes that despite potential options to replace Cochin pipeline flows, and the investments in new transportation and storage infrastructure that have already been announced, new investments in propane transportation and distribution capacity into the Midwest market region may be required to fully replace the Cochin during high demand periods.
Despite those obstacles, and more bumpy roads ahead, Doyle states he is upbeat, and the propane industry will work as one to identify and implement solutions. “With more time to prepare for this winter, despite increased challenges from things like the loss of the Cochin pipeline, we are optimistic that things will improve from last winter’s crisis. Carriers have been adding trucks, and more storage locations are going to have higher inventory levels as we head into the fall and winter. Retailers have added storage and will concentrate on keeping bulk storage and customer tanks full. NPGA, state trade associations, and legislators are also taking action, such as passing legislation to give state governors more authority to approve hours-of-service extensions. Having said all that, we have our sleeves rolled up and are preparing for more challenges this winter.” —John Needham