Bobtail Tank Head Shortage Improves, But Other Issues Surface

Tank-Head-Shortage-photos-1A shortage of propane bobtail tank heads is an element of last winter’s supply and infrastructure problems that drew less attention than other factors such as the late crop drying season and record cold temperatures. Earhart Propane (Trumansburg, N.Y.) is one company that felt the effects of a propane bobtail tank head shortage that began in 2013. Earhart was unable to get tanks for two trucks in the needed timeframe and had to use older, smaller tanks.

“I was told that the supply of tanks is about 50% of the demand and still six months out,” said Earhart co-owner Tom Overbaugh.

The company is experiencing these issues as the result of a tank head shortage that began last year, and Milt Swenson, division manager at Arrow Tank & Engineering (Cambridge, Minn.), sees that as the first part of the “perfect storm” that caused last winter’s propane supply and infrastructure problems. The tank head shortage began in early summer of 2013, and then a heavy crop-drying season followed before last winter’s record cold temperatures. In the summer of 2013, Trinity Heads (Navasota, Texas), which is the primary propane bobtail tank head manufacturer in the United States, experienced mechanical problems with the press that forms the heads. The machine was down or producing at reduced capacity for several months last year, which affected the operations of truck builders and their propane marketer customers.

Swenson noted that Trinity’s head press also shut down during parts of last December and January, only to start back up later in January. Shipping began again soon after that. But the issue caused a backlog at Arrow, and Swenson stated that his company is still working to catch up.Tank-Head-Shortage-photos-2

Arrow is currently quoting new tanks for delivery in the second quarter of next year, or about a five- to six-month lead time. And that’s for tanks only, not for a complete bobtail.

“Back in the good old days, if you ordered a tank only it was six to eight weeks,” Swenson said. “So you see how severe the backlog is right now.”

Asked for an update on the tank head situation, Trinity vice president of public affairs Jack Todd stated, “It is Trinity policy to not discuss specific operations or capacities; however, it should be noted that our Trinity Heads facility is currently operating at planned capacity.”

The tank head shortage has also brought attention to other issues causing delays in bobtail deliveries to the end-user propane marketers. A severe shortage of qualified labor to build the tanks is a main issue. Swenson doesn’t know the cause, but he thinks an improving economy in North Dakota might be a factor as well-qualified labor candidates might be leaving Minnesota for better-paying jobs in North Dakota.

Strong demand for tanks is another factor, and he believes that might be a residual effect of the perfect storm of a late crop drying season and cold winter, which meant marketers ran their bobtails harder last winter, causing them to wear out faster.

Yet another factor Swenson mentioned, at least in his area of the country, is that demand for more storage tanks is up because marketers want to build more storage to be better prepared for winter. The reversal of the Cochin pipeline accelerated marketers’ quest for additional storage.

Tank-Head-Shortage-photos-3And production of the Freightliner S2G propane-fueled bobtail is another issue highlighting the importance of the tank head shortage. Scott Swensen of Lin’s Propane Trucks (Dighton, Mass.) said he ordered S2G trucks in January 2013, but as has been widely reported, the release of the truck saw various delays, and the vehicle did not go into full production until several months ago. Combine that with heavy demand for other trucks as marketers gear up for winter, and you have a truck-building industry bursting at the seams.

“We’re booked through this fall, and now we’re getting 15 trucks in that we couldn’t reserve slots for because we didn’t know when they were going to come,” Swensen stated, referring to the S2G. “We’ve received 15 trucks; that’s a month’s worth of unexpected work landing on our door in the busiest building months of the year. Customers expect them to be built, but no one could really plan for it because no one knew exactly when they were coming.”

According to Swensen, Lin’s is doing fairly well with its truck-building schedule because the company planned ahead. Tanks that Lin’s orders from Trinity in October should be delivered around April, which is a lot longer than it used to take, but that doesn’t have as much of an effect on the truck-building company if it plans well.

Swensen believes extremely high demand for trucks and new tanks, not the number of tank heads produced, is the main problem. Instead of replacing trucks in their fleet and reusing tanks, many companies are adding to their fleet with new tanks. “Our new tank orders with Trinity are up 300% over last calendar year while our overall truck production is up 36%. That correlates to a huge increase in new tanks.

“We’ve never seen demand like this, ever,” he said. “It’s been a year where you really have to do a lot more planning. That was the case last year, this year, and it’s going to be the same next year as well, which is a departure from previous years,” he noted. “In previous years you could call in September and get a truck for October. It’s just not like that anymore. You need to plan ahead for your equipment. Right now we’re encouraging our customers to be planning for next year.”

Tank builder Westmor Industries (Morris, Minn.) experienced order delays at the height of the tank head shortage last year, but Mike Hennen, general manager for Westmor’s truck and trailer division, said his company has been getting a fairly steady supply of heads from Trinity since then. Some order delays took place over the summer, but his company stayed fairly well supplied with heads. Sharing heads occasionally with his competitor Arrow Tank helped ease the pain.

“It’s nice having a working relationship where we can share a little bit if we need to,” Hennen stated. “At the end of the day we’re just trying to take care of customers.”

Several marketers told BPN the tank head issue did not affect their operations. “We do more changeovers to new chassis as we have modern equipment,” said Joe Cordill of Cordill Propane (Winnsboro, La). “[We] may purchase [a] complete new bobtail every three to five years and could always delay a season if necessary.”

Although he noted the tank head shortage “is and continues to be real,” it has not affected Superior Plus Energy Services much, said Bruce Ruppert, director of business development for the Rochester, N.Y.-based company. “We have been fortunate enough to be able to almost exclusively re-use the barrels from old trucks for the new trucks we are building,” he explained.

Como Oil (Duluth, Minn.) was initially affected early in 2014 by lack of tank heads, but Jim Olson, the company’s vice president, safety, assets, said Como’s suppliers of residential and bobtail tanks seemed to recover, and for the most part met the company’s demands for new tank and bobtail purchases.

But Olson believes the tank head issue impacted an already-stressed market of used bobtails and bulk plant-size tanks. “Attempts to find used was a trying exercise in our Midwest regions,” he noted. “The rush to put in storage in the Midwest due to the infrastructure loss of the Cochin as well as the head issue were challenging to sourcing new, let alone used, vessels.”

The shortage affected marketers like Overbaugh of Earhart Propane, who had to use older, smaller tanks on two of its trucks. He explained that one of those trucks had a 3499-gal. container that had burned to a total loss.

“This was not a scheduled replacement,” he said. “Because of the shortage and our need to replace it before winter, we had to use a 2500-gallon barrel that came off a truck we had previously taken off the road. It was fortunate we kept it.” The other bobtail was a scheduled replacement with a 3000-gal. barrel.

The issue also had an effect on Reliable Propane (Clarence Center, N.Y.). The company on its most recent bulk truck replacement transferred the tank to the new chassis, said Reliable owner Ken Albrecht. “Each spring we project our truck purchases for the coming year, but we now have to plan two years in advance because of the scarcity of tank heads,” he noted.

That’s a good idea, says Swensen of Lin’s, who advises propane marketers to “plan, plan, plan.”

How should they do that? “They really should be starting to plan right now for trucks they’re expecting to use not in winter ’14-15, but ’15-16,” he stated.

And Swenson of Arrow Tank thinks marketers may have to do that for various reasons.

“If we have a heavy crop drying season this fall, which we may, and if we have a cold winter again, this whole thing could drag out to 2016 before we get caught up,” he noted.     —Daryl Lubinsky

MFA Oil Shows Its Commitment to Propane

MFA-Oil-for-photos-2When it was revealed in 2011 that CHS (Inver Grove Heights, Minn.) intended to purchase 100% ownership of an 85,000-bbld gasoline and diesel refinery in McPherson, Kan., it did not appear that propane had any role. The current minority partners involved with the sale are MFA Oil (Columbia, Mo.) and Growmark (Bloomington, Ill.), both farmer-owned co-ops. Funds that MFA Oil received from the transaction went toward expanding its propane business through the purchase of several propane companies.

MFA Oil is a farmer-owned co-op, which means the more than 40,000 farmers who buy the company’s products to fuel their farm operations are MFA Oil owners. Missouri farmers organized MFA Oil in 1929 because they wanted a reliable supply of petroleum products at a fair price. In addition to propane, the co-op sells gasoline, diesel, oils and lubricants, and biomass renewable energy. Its sales of propane are geared primarily toward residential customers, but poultry barn heating is also a prominent part of the business.

“Refineries are worth a lot of money these days, and with CHS buying us out, we’ve had a lot of capital come into the company,” said Mark Fenner, president and CEO of MFA Oil. “So we’re essentially parlaying the money that we’re getting back from that refinery into buying businesses that support our key initiatives, and that’s bulk fuel and propane — especially propane.”

MFA Oil, which also operates Break Time convenience stores in Missouri and Arkansas, Jiffy Lube locations in Missouri, and Big O Tires locations in Missouri and Arkansas, has been stepping up its involvement in propane in recent years. Of its 16 acquisitions since 2012, 11 were propane companies. If you ask Fenner why his company is focusing more on propane as of late, he will tell you simply that investing in propane companies is a good financial move right now. “There tends to be a better return on investment and stronger margins in the propane business than in bulk fuel for various reasons, and we feel like we’re pretty good at it.” MFA Oil plans to continue pursuing other propane operations. Fenner believes that family-owned propane companies see MFA Oil’s co-op background as a positive attribute that enhances its reputation for customer care.

“They see us and our culture as being pretty customer-intimate,” stated Fenner, who took over as president and CEO in September after the retirement of Jerry Taylor. Since joining MFA Oil two years ago, Fenner has served as COO, with the plan that he would then take over as president and CEO upon Taylor’s retirement.

As part of Fenner’s duties, he worked to ensure customer tanks were full during last winter’s supply and infrastructure problems. He noted that while various propane companies failed to honor some customer contracts when prices hit around $5/gal. in some locations, MFA Oil met all of its contractual obligations, even as it was forced to transport about 50 loads of propane from Mont Belvieu to Missouri, incurring major freight charges. But he noted that MFA Oil did a good job of filling customer tanks or getting contracts done ahead of the heating season. Although the company raised prices on its floating-price customers, it kept them below $4/gal.

Fenner feels good about MFA Oil’s recent propane company acquisitions. With the purchase of Home Service Co. in Poplar Bluff, Mo., announced in September, MFA Oil adds new customers in southeast Missouri and northeast Arkansas. Home Services’ propane division offers bulk deliveries and 100-lb and forklift cylinders. The business also sells appliances including water heaters and gas logs.

“We got both propane and refined fuels in that purchase,” he noted. “It fits very well because it’s essentially right there in geography where we have a presence. So that’s been a very smooth transition so far.” MFA Oil on the same day announced its purchase of All Propane (Murfreesboro, Tenn.), its first propane operation in Tennessee.

In October, the co-op announced an additional acquisition, New Hampton Implement and Propane (New Hampton, Mo.). The company covers propane customers in northwest Missouri, and MFA Oil will service those new accounts from its existing company locations in Albany, Stanberry, and Bethany.

“That was a smaller family-owned operation, close to another one of our plants,” Fenner noted. “We’ve known that company for some time, and they called us and got a deal done.”

The company’s 11 district managers have improved the process of acquiring companies. When one company purchases another, the buyer inherits the attained company’s employees and customer base in addition to hard assets. MFA Oil works to make sure its recently gained customers are happy with their new propane company. “We’re not here to treat them poorly or like a one-and-done type deal,” Fenner stated. “We’re in it for the long haul.” A lot of the [propane companies] we’ve been buying, they know how well we take care of customers because many of them had been right next to our plants that we run. Not all of them but some of them have. So they kind of seek us out.”

In a propane company purchase, the acquiring company usually must convert the attained company’s point of sale system to its existing system. MFA Oil has developed a process to help with those and many other aspects of the procurement process.

A group of MFA Oil employees have taken on additional duties as “training agents,” who help employees from the acquired company transition to MFA Oil’s culture and systems. That culture includes a focus on safety, and company policy requires service employees to shut down any customer system they deem unsafe.

“We don’t want to have issues out there where we compromise anything or anyone, and it just goes along with our safety mantra, making sure people are safe. Employees know that even if you have to lose a customer over some safety issue, that’s better than having an incident. But we don’t tend to lose customers. They understand that we have their best interests at heart and are trying to keep them safe as well.” —Daryl Lubinsky

The Cavagna Group: Innovating Solutions to Increase LPG Use

Whether it’s scaling the highest peaks in the world or exploring the deepest depths of the ocean — lighting the Olympic Torch or the backyard barbecue — the Cavagna Group makes it possible with its compressed gas valve and regulator products. The Cavagna Group helped Ardito Desio reach Pakistan’s K2 summit in Cavagna-for-photos-1introImage1954 by using a specially designed alloy breathing air valve. The company supplied the valve and regulator system for 12,000 Olympic torches used during the 2006 Winter Games in Turin. And in 2010, Cavagna’s post-medical valves were used in the dramatic rescue of the 33 Chilean miners trapped underground for 69 days. These and many other achievements were made possible in part by the innovations of the Cavagna Group.

The Cavagna Group began as a small company in 1949 when Paolo Cavagna and his five sons opened a factory to transform non-ferrous metals after World War II. The factory was located north of Milan, Italy, in Brescia, a city historically known for its metallurgical industry, mechanical and automotive engineering, and machine tools. Within a few years, with the family’s hard work, the Cavagnas expanded their activity to manufacturing finished products for LPG. Today, the company employs approximately 1000 people worldwide and continues to be operated by Paolo’s descendants.

The Cavagna Group consists of nine vertically integrated production companies in Italy, and nine others spread across the five continents. Products are sold in more than 135 countries worldwide, making Cavagna one of the leading manufacturers of equipment and components for controlling compressed gases (energy gases, alternative fuel gases, medical gases, industrial gases, and specialty and cryogenic gases). Currently, Cavagna is divided into six divisions: LPG regulators, LPG valves and tank equipment, high-pressure equipment, natural gas and metering, alternative fuel systems, and engineering services.

According to company CEO Davide Cavagna, today’s dynamic market calls for a strong proactive approach for identifying solutions to the challenges that families and industry face today. “The social impact of constantly rising fuel costs, the need for alternative fuels, and sustainable environmental practices are pressing issues that can’t be ignored. The Cavagna Group is working to identify new LPG markets that will help address some of these issues, including developments in the autogas industry and the manufacture and distribution channels needed to convert vehicles and equipment to LPG. Additionally, our innovative Greengear project also moves the industry forward by focusing on converting a variety of small gasoline-powered engines to propane,” said the Cavagna Group CEO.

With innovation, safety, and reliability the three cornerstones of Cavagna’s business model, the company stresses research and development. It has developed partnerships with European institutions and universities to conduct research and development for each of its product lines. The group has introduced several new products in 2014.

Freespace for All Taxi

This summer Cavagna unveiled a new taxi vehicle for the disabled in Milan. The taxi is the product of a partnership between Cavagna Group, Rolfi (an Italian company that specializes in vehicle modifications for the disabled), and French automaker Citroen. The new taxi, named the Citroen Berlingo Freespace for All, features a hybrid bi-fuel engine (Cavagna provided the technology needed to power the car on LPG), an innovative fuel tank, and a low floor that allows the original vehicle chassis to be used. The taxi modifications allow a disabled person in a wheelchair to easily and quickly be loaded by ramp. The taxi can be returned to its five-seat arrangement when a disabled person is not on board. The environmentally friendly taxi is an advancement over previous vehicles that rely on elevators and raised roofs to accommodate wheelchairs.

With Milan hosting the 2015 World’s Fair, city officials in the traffic-choked metropolis are advocating for the use of these eco-friendly vehicles to accommodate disabled passengers and reduce pollution.


Another Cavagna innovation in 2014 is its ENERKIT conversion line, technology that allows traditional and OEM combustion engines powered by gasoline to easily be converted to propane. From outdoor power equipment to off-road vehicles, ENERKIT is committed to supporting the increased use of LPG fuel for a healthier, more economical, and more environmentally friendly lifestyle. By replacing the carburetor, ENERKIT enables small engines to be converted to LPG, thus lowering emissions, reducing the need for engine maintenance, and eliminating gasoline spills.Cavagna-for-photos-2

The ENERKIT conversion kit comes in two categories: ENERKIT Basic and ENERKIT Plus. The ENERKIT Basic is designed for mono-fuel, two- and four-stroke engines from 20 cc to 450 cc for equipment such as lawnmowers, power generators, water pumps, and pressure washers. The LPG carburetor is installed between the air filter and intake manifold and comes in three models for hand-held tools such as trimmers powered by cartridges, walk-behind/recreational equipment such as lawnmowers powered by cartridges or small cylinders, and free-standing equipment such as generators powered by cylinders.

ENERKIT PLUS converts 250-cc to 850-cc four-stroke engines (for products such as riding mowers, turf vehicles, industrial equipment, forklifts, and riding mowers) to LPG.

Yet another innovation is the introduction of Greengear, a global brand of propane-powered equipment for cleaner, safer, and lower-cost operation. Cavagna’s mission is to increase consumer awareness and knowledge of LPG/propane fuel. The Greengear product line includes lawnmowers and generators (shown at left), riding mowers, snow blowers, water pumps, barbecues, heaters, and additional everyday equipment. All these products use Cavagna’s ENERKIT technology. “These innovative products support the propane industry globally by providing consumers greener and safer alternatives to traditional gasoline engine equipment,” said Greengear director Giorgio Basaglia. “With environmental concerns increasingly shaping consumers’ purchasing decisions, policymakers and governments will be further challenged to address the need for reducing emissions,” added Basaglia.

As a second-generation family business, the Cavagna Group remains firmly committed to its three core principles: safety, innovation, and reliability, as well as developing new products that serve to further the use of LPG as an alternative fuel — from the top of the world to the bottom of the world — and nearly every place in between.      —Andrea Young

Ramping Up for Waterborne Exports

WaterborneExports1Production of gas, oil, and NGLs in the U.S. is surging, and rising propane volumes are a slice of that overall good news. After decades of scarcity, the nation is experiencing a resurgence of its energy resources, with some observing that technologies such as horizontal drilling and hydraulic fracturing are ushering in a new era of abundance. With propane going along for the ride, the country has recently become a net exporter of the liquid, a move that is celebrated by many, but bemoaned by some on the retail side of the propane industry. Nonetheless, the rising tide of propane supply is being accompanied by multimillion-dollar investments to make it possible to export increasingly higher volumes from the U.S. East, West, and Gulf coasts.

The U.S. shale revolution has ICF International forecasting propane production from North American NGLs climbing from 333 MMbbl in 2013 to 552 MMbbl in 2020, then to 628 MMbbl in 2025. Marcellus and Utica shale output grows from 16 MMbbl in 2013 to 124 MMbbl in 2025, Bakken production to more than 57 MMbbl in 2025, and Niobrara (Rockies) production increases from zero in 2010 to nearly 24 MMbbl in 2025. Further, North American gas plant NGL production has increased by more than 24% since 2009, concentrated in propane and ethane.  

But with the domestic propane market shrinking, producers and midstream operations are looking at the international market to clear the excess LPG volumes that have become available. According to the American Petroleum Institute’s (API) “2012 Sales of Natural Gas Liquids and Liquefied Refinery Gases” survey, odorized propane sales in the nation stood at nearly 7.74 Bgal. in 2012 as opposed to the almost 8.9 Bgal. sold just a year earlier, a loss of nearly 12.9% year over year. That latest decline, the most recent information available, follows a 3.3% shortfall in 2011 compared to 2010, about a 7.6% drop in 2010 compared to 2009, a 4% dip in 2009 from 2008, and a deficit of 3.4% in 2008 compared to 2007. The last year sales showed an improvement was in 2007 over 2006, when volumes rose 7.8%. For the five-year period—2008 through 2012—U.S. odorized propane sales eroded by more than 2.2 Bgal., representing a near-22.2% retreat, according to API. With domestic markets flat and declining, almost all LPG production growth is now being exported.

Market watchers underscore that exports are critical to sustaining U.S. NGL production. Absent them, inventory “overhang” would likely be devastating to rig counts, idling operations. Therefore, exports are a key tool to balance supply and keep production humming. As the U.S. has become more competitive in the worldwide propane market due to the impact of shale production and lower domestic prices compared to world prices, incentives remain in place for continuing to boost exports.

The latest figures available from the U.S. Department of Commerce (DOC) show propane exports running at nearly 13.4 MMbbl in July, 14.7%, or about 1.7 MMbbl, higher than the June total and up 59%, or almost 5 MMbbl, from July 2013. DOC reports that exports in the first seven months of this year have reached over 82.1 MMbbl. Total 2013 propane exports were at a reported 110.2 MMbbl, according to DOC. Compared to just two years ago, current exports dwarf the 2012 export total of about 62.4 MMbbl.

All those exports require infrastructure, namely terminals to move waterborne product offshore. As outlined by FC Gas Intelligence, among the LPG terminals that are currently operational and/or undergoing expansion is Targa Resources’ Galena Park/Patriot facility on the Houston Ship Channel. Targa said early last year that it had acquired additional property close to its existing LPG export infrastructure at the Galena Park Marine Terminal.

The purchase was to provide expansion potential for its propane and butane exports. The first phase of the expansion was commissioned in September 2013, and increased the company’s export capability to about 3.5 MMbbl to 4 MMbbl a month. The second phase of the project is expected to be completed in the third quarter of this year, adding an additional 2 MMbbl a month of export capacity. Targa has commented that it has already contracted for the lion’s share of the extra capacity with offshore buyers.

Another is Enterprise Products’ Oiltanking complex expansion, also on the Houston Ship Channel. Announced in January 2014, the project is expected to be completed by year-end 2015, at which time Enterprise would have aggregate capacity to load more than 16 MMbbl a month of propane or butane, with that capability including an increase to about 27,000 bbl an hour. The terminal expansion is being supported by a 50-year service agreement with Oiltanking Partners to provide dock space and related services. The company had previously laid out plans to build a second LPG export terminal rather than expand at the Oiltanking site.

AltaGas Idemitsu, a joint venture between Japan’s Idemitsu Kosan and AltaGas, said in August that Petrogas Energy, two-thirds owned by the joint venture, had completed its first shipment of LPG from its Ferndale, Wash. terminal. The facility, which was acquired by Petrogas in March from Chevron, can handle up to 30,000 bbld. The terminal is served by rail, pipeline, and truck, and is also connected to two local refineries. Petrogas will export butane for delivery to Idemitsu’s Chiba refinery in Japan for petrochemical feedstock.WaterborneExports2

DCP Midstream Partners confirmed in August that it has contracts in place with a Marcellus midstream operator to export butane from its Chesapeake terminal. The company said that phase two of the project to store and export butane is under way, and that exports would begin late this year. Chesapeake will initially be able to load 7000 to 8000 bbld. The firm already exports propane from the facility, and is making engineering changes to allow additional shipments.

Sunoco’s Marcus Hook Industrial Complex on the Delaware River, a refined products and crude oil terminal, features 2 MMbbl of LPG cavern storage and is the planned terminus for the Mariner East 1 and Mariner East 2 pipelines. Mariner East 1 will deliver propane and ethane from the Marcellus Shale production area, shipments that are expected to begin arriving soon. As part of the project, Sunoco will construct new facilities to distribute propane and ethane to local, regional, and international markets. The Mariner East 2 pipeline from the Marcellus and Utica shales is expected to be operational in the fourth quarter of 2016.

Export facilities in the planning stages include Sage Midstream’s Longview terminal at the Port of Longview, Wash. The facility is to have an initial capacity of 47,000 bbld, with operations commencing in the fourth quarter of 2016. Sage subsidiary Haven Energy Terminals says the facility will feature the first full-containment propane and butane storage tanks to be constructed in the U.S., and will have the capability to load vessels with capacities of up to 550,000 bbl.

Another planned terminal is Occidental Petroleum’s Ingleside propane export facility in Corpus Christi, Texas. Occidental said in July 2013 that it plans to build the terminal at the Oxy Ingleside Energy Center. Supplied by Eagle Ford shale liquids, the facility is expected to begin operation in January 2015, contingent on the company securing the required contractual arrangements. Occidental said it could also export other fuels from Ingleside, including natural gasoline, condensate, and butanes.

Yet another is Sunoco’s Mariner South project. In May 2013 Sunoco and Lone Star NGL, a joint venture between Energy Transfer Partners LP and Regency Energy Partners, agreed with Shell Trading U.S. to further develop the Mariner South LPG terminal, with Shell as the project’s anchor customer. Expected to be operational in the first quarter of 2015, the Mariner South terminal will have an initial capacity of 6 MMbbl a month and will be designed to load LPG carriers with the capacity of about 550,000 bbl. Development will involve the construction of a new 100,000-bbld de-ethanizer to produce international grade propane, along with refrigerated storage tanks, and will have a load rate of 30,000 bbl an hour.

WaterborneExports3The Mariner South pipeline will transport propane and butane from Lone Star’s storage and fractionation complex in Mont Belvieu to Sunoco Logistics’ terminal in Nederland, Texas. In addition to export-grade propane and butane, the pipeline will be available for other natural gas liquids and petroleum products, depending on shipper interest. The pipeline is anticipated to have an initial capacity of about 200,000 bbld, and can be scaled to support higher volumes as needed.

Pembina Pipeline Corp. said in September it had selected the Port of Portland in Portland, Ore. as the site of its West Coast propane export terminal. In August, Pembina entered into an agreement with the port that establishes the terminal site, which includes an existing marine berth and outlines the commercial lease terms. Under the agreement, the company will begin the process of engaging and consulting with port neighbors and government and environmental authorities.

Pembina intends to initially develop a 37,000-bbld propane export facility, investing about $500 million. The anticipated in-service date is early 2018. The company expects that the West Coast terminal will provide growing propane supply derived from natural gas produced in western Canada with access to international markets. The port is along the Columbia and Willamette rivers. The Columbia River provides deep-water access to the Pacific Ocean. The port has land available for the installation of storage, piping, rail facilities, and marine infrastructure.

Phillips 66 said in February 2014 that it had received approval from its board of directors to move forward with plans to build an LPG export terminal at its existing marine terminal in Freeport, Texas. The $1-billion project is a push to access international markets for refined products used in gasoline blending and heating. Expected to become operational in mid-2016, the terminal will have an initial export capacity of 4.4 MMbbl a month, about the size of eight very large gas carriers (VLGCs), and a ship-loading rate of 36,000 bbl an hour.

The project will include NGL storage and additional pipeline connections to the Mont Belvieu market hub. Phillips 66 broke ground for the project in September. The company’s Sweeney refining and chemicals complex in Old Ocean, Texas and its Gulf Coast Fractionators facility in Mont Belvieu will provide the new facility’s supply of LPG.

Finally, Kinder Morgan is building a new LPG export facility at its Fairless Hills, Pa. terminal on the Delaware River. Phase 1 of the project, due to come into service in 2015, will include 200,000 bbl of butane storage with a loading capacity of 12,000 bbl an hour. Phase 2 will see the construction of a chilled propane storage facility with a capacity of 200,000 bbl.

Still other NGL export facilities have been proposed, including in Louisiana. However, experts underscore that the availability of additional propane export capacity does not guarantee that all the capacity proposed will be used, or for that matter, that all the terminals in the planning stage will be built. Rather, terminal construction and expansion is aimed at linking the domestic propane market to the international market. As a result, lower domestic and higher international propane prices are expected to narrow their differences and draw closer together on a rough basis.

U. S. propane will stay in domestic markets—if the price is high enough. What this means for U.S. marketers is that propane in storage will not automatically be available to the domestic market, and acquiring supply will require price bidding or contracted storage. Seasonal stock builds for winter demand will no longer be automatic, and seasonality of international demand will impact domestic markets.

Further facilitating access to international propane markets is the Panama Canal expansion, due to come online in early 2016. As noted by the Energy Information Administration (EIA), the canal, an important route connecting the Pacific Ocean to the Caribbean Sea and the Atlantic Ocean, currently has a limited role in global petroleum product transport.

The canal’s current size restrictions means smaller vessels, referred to as Panamax class ships, with capacities of about 400,000 bbl to 500,000 bbl, are the only ships that can safely pass. However, with the expansion completed, larger vessels with up to 680,000-bbl capacity will be able to pass, opening the door to increasing petroleum transport. Most importantly, when the expanded canal opens, it will make it possible for the world’s entire LPG carrier fleet to transit, including the largest VLGCs of up to 85,000 cu meter capacity.

Scott Gray, senior director of Houston-based IHS/Waterborne Energy, comments that with the opening of the expanded Panama Canal coming soon, U.S. propane markets are on the cusp of changes that will displace long-established export routes. More cargoes from the Gulf of Mexico will go to Europe, adding to the volumes already leaving U.S. shores for that destination from the Gulf and East Coast. In addition, shipping times and freight rates to Asia will be lowered, making exports to that region more cost advantaged.

However, he cautions that just having the ability to export at certain rates, and from different locations, doesn’t mean those capabilities will necessarily be realized or maximized. “Terminal projects and the Panama Canal expansion certainly lead to more export capability and capacity, and expectations that the capacity will ultimately be used,” he says. “But for example, consider that your car’s speedometer says the vehicle can go 120 miles per hour. Maybe it can and maybe it can’t, but you’re unlikely to drive it that fast. What actually ends up being shipped through these new terminals and through the Panama Canal, and where it will go, is still a big, fat unanswered question.”

What is known, he adds, is that the U.S. is building out infrastructure to enable it to be the single largest provider of over-water LPG to the international marketplace. He says international markets should be thought of as being represented by concentric circles, with the Gulf Coast at their center. Mexico, Central America, and the Caribbean represent the closest circle to the U.S. and now take the bulk of U.S. LPG exports. Those regions are followed by South American countries such as Brazil and Chile. Europe, the Mediterranean, West Africa, and Morocco are in the export mix as well, but to a smaller extent, while Asia is the outlier and constitutes the largest circle and a market that is still developing.

“Europe has relatively limited storage that fills up and empties pretty fast,” Gray explains. “There is only so much product storages can take before they are satisfied, and because they fill up and empty so quickly, it causes prices to wobble. Making a profit can be problematic if deliveries aren’t timed just right.” He adds that Europe, like North America, is a mature LPG market.

Regarding Asia, the outermost concentric circle from the Gulf, the region has generally been supplied by the Middle East, an area whose LPG production has been in mild decline, notes Gray. Moreover, with North American LPG production stepping up, along with its ability to export cargoes, Asian buyers are increasingly seeking to diversify their supply sources while continuing to buy from traditional suppliers such as Qatar and Kuwait. That diversification is leading them increasingly to the U.S., where Mont Belvieu-benchmarked LPG, along with attractive freight rates, has seen rising tonnage leaving the Gulf of Mexico for Japan. Gray comments, however, that at present Asian demand is not rising commensurate with the increasing volumes that are expected to be available for export from the Gulf.

EIA in a recent report noted that the Americas, which include North America, Central America, the Caribbean, and South America, account for a significant portion of global supply, demand, and trade of both liquid fuels and natural gas. Liquid fuels include all petroleum and petroleum products, natural gas liquids, biofuels, and liquids derived from other hydrocarbon sources. At the outset of 2013, the Americas region accounted for one-third of proved worldwide reserves of crude oil, at 536 Bbbl, and one-tenth of proved natural gas reserves, at 688 Tcf, as well as immense recoverable resources of oil and gas, including reservoir resources, tight oil, and shale gas.

The U.S. has been a major petroleum product supplier to the Americas for the past decade, and its significance as a product supplier has grown considerably in recent years. In 2003, the nation exported 0.6 MMbbld of petroleum products to other counties in the Americas, primarily to Mexico and Canada. In 2012, U.S. exports to countries in the region totaled 2 MMbbld, still primarily to Mexico and Canada, but increasingly to other countries, most notably Brazil and Chile. In addition, the Americas are sending increasing volumes of liquid fuels to China and India. As a result, the U.S. has become a net exporter of petroleum products, including propane.

The expansion of the Panama Canal will double the historic waterway’s transit capacity. The relaxation of the longstanding constraint on trans-Isthmus waterborne shipments should foster expansion of energy trade between producers on the Atlantic side of the canal and oil- and gas-hungry markets on the Pacific side, including China, Japan, and South Korea.

EIA comments that recognizing the abundance of hydrocarbon resources in the Americas, and the availability of technical capabilities to produce them, companies within and outside the region have invested heavily in developing and producing liquid fuels and natural gas. Both international oil companies and state-owned companies in the Americas have made the most substantial investments, followed by companies based in Europe and in Asia and Oceania.

Foreign investment in the region has been concentrated in those countries with legal and regulatory structures open to foreign investment. Countries with the most open structures like Canada, Brazil, Colombia, and the U.S. have attracted significantly more investment than others in the region. Mexico, which recently adopted new energy reforms that allow some types of foreign private investment in the energy sector, looks to join their ranks.

EIA observes that Asian investment in the region has risen dramatically in the past five years, in particular, investment by China’s national oil companies to secure both crude oil supplies and physical assets, such as refineries, especially in those countries considered to have more restrictive foreign investment laws and regulations.

The agency concludes that the Americas region holds an abundance of existing proved reserves, as well as the promise of abundant resources of both oil and natural gas. While the Americas have accounted for a considerable portion of the global markets in liquid fuels and natural gas and have attracted sizable investments, the region has the potential for further expansion and development.         —John Needham

Be Concerned

This winter’s supply structure will likely

be “stressed but sufficient,” but what

about the winter after that? 

Unless the propane industry sees a heavy grain drying load again and another colder-than-normal winter, the propane supply situation should be OK this coming winter of 2014-2015. Mike Sloan of ICF International (Fairfax, Va.) says the propane supply structure is likely to be “stressed but sufficient.” But the following winter of 2015-2016 might be an area of concern as propane export capacity is expected to increase faster than propane production in both 2015 and 2016.

Sloan, in a presentation titled, “2015 Propane Market Outlook—Impact of Changing Propane Supply on Propane Markets,” given on July 17 at the Propane Education & Research Council (PERC) meeting in Santa Fe, N.M., noted that limited options existed in the past for the propane that was produced in North America. When production during the summer exceeded demand, propane marketers could reasonably expect propane to be placed in storage during the offseason and to be available for purchase during the peak winter season when demand exceeded production.Sloan-1
“However, with the growing export market, that’s no longer automatic,” Sloan told BPN following the meeting. Propane marketers and consumers must be aware of where their supply is coming from and be more willing to make commitments to ensure that the supply is where they need it, when they need it.

He noted that the propane industry is facing other challenges on the demand side, but opportunities exist there, as well. ICF expects conventional residential demand to continue to decline nationally because of improvements in efficiency and competition from electricity. But real opportunities exist in the engine fuel market, as Fig. 1 shows, and those aren’t going to go away. Opportunities in the fueloil conversion market also look promising. Growth from those markets should offset losses in the more traditional propane markets.

As propane production continues to grow, producers must develop new markets for that increase, because it won’t come from the consumer market. That means additional exports and greater petrochemical demand are likely, and those markets are easier for producers to serve than the seasonal market. That again means propane marketers must be more proactive about lining up their supply and figuring out how to deal with seasonal fluctuations in demand.

Sloan-2The increase in propane production is linked to the broader growth in natural gas, natural gas liquids, and light oil production. The broad growth in petroleum production is leading to what Sloan sees as a major issue for the propane industry: congestion on the existing pipeline and rail transportation infrastructure. Consumer propane is competing with other NGLs for available pipeline transportation capacity. In addition to the issues caused by the Cochin Pipeline no longer carrying propane, the growth of diluent demand in Canada is increasing congestion on pipelines flowing north. And the need to move y-grade mixed NGLs to market from the new producing fields in the Bakken and the Marcellus has put a premium on capacity moving down into the Gulf Coast. Fig. 2 shows additional trends reducing seasonal propane transportation capacity.

The industry’s reliance on rail is also increasing because of the changes in supply, and rail reliability is a significant concern, particularly during colder-than-normal weather conditions.

With the additional demand reducing the availability of the transportation assets for seasonal use, Sloan observes that’s one more factor making it more important for marketers to make sure they know how they’re going to get propane into their markets when it’s needed.

In the absence of the Cochin Pipeline, the ability to move propane into the Midwest is much more limited than it was last year, but Sloan believes the problems will be relatively minor if the next winter is near normal. With growth in production from the Bakken, and use of available pipeline space on the Oneok, Teppco, MAPL, and Nustar pipelines, that should even out the problems. The pipelines in the past have been underutilized for much of the year, and even during winter periods when the weather has been warmer than normal, the pipelines have been underused, Sloan stated.Sloan-3

“There’s less underutilized capacity now because of the changing market structure, but there is still enough so that a fair amount of the Cochin volumes will be replaced through increased flows on other pipelines in the region,” he added. Without the Cochin, people will have to go a bit further with transports and bring more in by rail.

Marketers and their customers will have to make significant adjustments, but Sloan believes the available capacity should be there to allow them to make those adjustments. That is, unless demand this fall and winter resembles last year.

“And if we do get a high-demand fall and winter, I’m concerned about another year with periods of significant shortages in the Midwest.”

Fig. 3, showing data as of Aug. 15, supports Sloan’s view that available capacity should suffice in a close-to-normal winter. Propane inventories have been increasing rapidly at PADD 3, which includes Mont Belvieu and the Gulf Coast. Storage additions are averaging 1,165,000 barrels per week this year compared to an average of only 390,000 for 2011 to 2013. That puts Mont Belvieu in very good condition for this time of year, and Sloan feels that should carry over leading into the coming winter. PADD 2 in the Midwest is more of a concern. He noted that in addition to the Conway, Kan. hub, PADD 2 includes Midwest territory all the way from Kansas to Minnesota, Wisconsin, and Illinois. As Fig. 4 shows, also as of Aug. 15, PADD 2 storage injections are moderately higher than the last three years, with additions averaging 788,000 barrels per week this year. That compares to an average of 676,000 for 2011 to 2013. Speaking to BPN on August 1, Sloan noted that PADD 2 inventories a week earlier were at the bottom of the five-year range. He hoped the numbers the following week would show a solid build indicating inventories are moving up toward the five-year range. Without that build, marketers should be concerned and plan accordingly.

Nationally, inventories have been building nicely, but they have been distributed differently, with most of the growth coming in the Gulf Coast and less in the Midwest.Sloan-4

If this coming winter is closer to normal, the focus will turn to winter 2015-16. In 2015, as shown in Fig. 5, a clear disconnect is evident between the expected growth in propane production and the increase in propane export capacity. Fig. 6 shows some export terminals planned in the coming years.

“We can’t possibly export all the propane that could be physically exported by the higher amount of export capacity, and nobody expects that to happen,” Sloan noted. “However, the fact that the export capacity is coming online means we will be fully connected with the international market, and much of this capacity growth will be utilized.”

He has heard that export terminals coming online will see a significant amount of use. Some of the facilities are reportedly fully contracted already, and most are at least partially contracted now.

“Given the increase in export capacity, that for me raises a very significant concern that we may see in 2015 and in 2016 what we saw in 2013, which was that when the export capacity came online, we saw a very rapid decline in inventories, setting up the problems we saw last year, particularly in the Midwest.”

The main message of Sloan’s presentation: If you don’t know where your propane supply is coming from, it may not be there when you need it. If next winter is a warm one, there won’t be any issues. If next winter is colder than normal, particularly in the Midwest, there could be issues similar to last winter.Sloan-4b

“And for 2015 and 2016, given the change in export capacity, these will be the years where it’s really important for marketers to have figured out their supply situation. Because even in a warm winter, or normal winter, with that much export capacity coming online, marketers who have not committed for their supplies prior to the start of the winter may have significant difficulties finding available supplies during the winter.”
 —Daryl Lubinsky