The National Propane Gas Association
(NPGA) released a statement on June 2 from its Propane Supply and Logistics Committee and Suppliers Section regarding supply concerns many retailer marketers were having: “Over the last few months, many of you reported to NPGA that you were experiencing challenges in securing supply for the upcoming harvest and winter. NPGA’s Propane Supply and Logistics Committee and NPGA staff investigated these concerns and determined that for the first time in recent memory, it has become a ‘seller’s market’ for propane, notwithstanding the dramatic increase in propane production over the last decade.”
The association listed these factors for the current situation:
- Relatively low crude oil and natural gas prices;
- Declining rig counts for both oil and gas;
- The Saudi Arabia-Russian dispute leading to the world being awash with crude oil;
- The subsequent drop in oil prices;
- The dramatic COVID-induced declines in demand for motor gasoline, jet fuel, and diesel fuel; and
- Refineries consequently ramping back production.
The statement went on to say: “At this time, information from IHS Markit and the U.S. Energy Information Administration estimates there is enough propane supply to meet domestic needs and export volumes, despite the global factors. Some of you have reported that in some circumstances, sellers are unwilling to commit to the same contractual agreements as in the past. These conditions mean some marketers may need to look to new sources of supply to meet their needs, transport supply from greater distances, and consider paying higher costs to secure supply.”
NPGA suggested marketers review their supply and logistics planning for the fall and winter and use two NPGA-developed resources for members on their website: the “Supply Planning White Paper (6/2020)” and the “ABC’s of Supply Preparation.”
NPGA’s “Supply Planning White Paper (6/2020)” is based on the vast experience of many Working Group members, who elaborated on three key suggestions as well as a few others. Those of note include: Make sure you have more than one propane source to rely on; storage buys you days, sometimes many days that you really need, making it a great investment; and it is important to have access to enough trucks to move supply from faraway supply points.
In referring retail marketers to this 2013-14 white paper, NPGA believes the strategies that were recommended in a tight market then would be strategies to utilize in a tight market now. The NPGA recommendations are not designed to be a “one size fits all” approach, it notes.
“The white paper from 2013-14, available to members on the NPGA website, is actually the 15-page set of recommendations condensed from a 200-page document prepared after all of the challenges from the ‘Polar Vortex’ season,” said Jeff Petrash, NPGA vice president and general counsel. “We knew we would see tightness again in coming years and the recommendations are still very applicable in today’s market situation.”
Highlights include demand forecasting: This can be done by considering past gallon sales and a review of future weather forecasts, among other factors. NPGA suggests utilizing of 60-, 30- and 15-day weather forecasts to modify supply plans, if needed. While most market planning is based around the concept of a normal winter, a marketer should also be more flexible and consider the possibility that warmer-than-normal and/or colder-than-normal temperatures may occur, so planning should include options for wet propane that can be acquired under conditions of market stress. Making changes to a supply plan, even only 30 days out, can mean the difference between success and crisis for a propane retailer. More tools to help gauge agriculture demand are now available from the Propane Education & Research Council (PERC) for crop drying (see p. 34). Supply contracting is another key area: Retail propane marketers need to be savvy, the white paper states. Prior experience; reputation in the industry; a supplier’s asset strength and underlying financial capability; and recommendations from other customers should all be evaluated.
Some questions NPGA recommends a marketer ask when interviewing a prospective supplier include:
- What winter-to-summer ratio can you provide?
- What alternatives or back-up supply can you provide?
- Can you tell me where the propane is coming from, and is this source reliable?
- Will you commit contractually to deliver the supply I need?
- Can you assist me with transportation if I need it?
- How strong are you in the region where I buy propane and do you have a reliable source of supply?
The role of propane brokers was discussed by the Working Group, who agreed that brokers play a valuable role in making markets for propane and assisting marketers in meeting their supply needs. Brokers, however, do not control the assets for propane production or transportation and are reliant on asset-based upstream companies for their supply. It was concluded that marketers who are solely reliant on brokers for their supply must have a firm understanding of where the supply is coming from and may be placing themselves at additional risk.
The white paper suggests that marketers must understand the details of earning winter volume on pipelines as most supply contracts include winter/summer ratios. A typical example is a marketer may “earn” two gallons of winter or peak season volume for each gallon purchased in a summer/low season. Marketers should understand the issue of allocation, a situation where product is rationed or limited during a peak period. Even when a pipeline system has enough product, individual suppliers may invoke their own allocation when they have inadequate supply to meet their customers’ needs.
Another key issue addressed: How much of projected demand should a marketer commit itself to for contracting purposes? In this context, the term “contracting” means a firm commitment by the marketer to purchase and the supplier to deliver the product at a given place in a certain timeframe. It does not necessarily mean that the price is fixed or locked in. Pricing and the basis of pricing are separate issues.
After considerable discussion, the Working Group came to agreement that a marketer should contract for approximately 50% to 70% of its supply as long as there is firm demand for the product. This range of 50% to 70% allows for some reduction in perceived demand due to warm weather or reduced crop harvest conditions. For areas where supply is difficult to source in winter or where outages are common, marketers should consider contracting at the higher end of the range.
Before finalizing any agreement with a supplier, it is critically important to know the answer to these questions:
- What obligations does the buyer have to purchase the product, by month or season?
- Does the buyer have to purchase the total volume if weather is warm, and can it purchase extra volumes during cold period?
- What seasonal ratios will the seller give, and are they providing the buyer with the full allocations they earn from the buyer’s business on a given system?
- What recourse does the buyer have if a supplier defaults, and what can the seller do to the buyer if it fails to perform?
Third-party advice is often very useful in agreeing to supply contracts. Preparing contingency plans and building diversity into the supply plan is critically important. The group stressed that the supply landscape is changing and the need for a well-conceived and executed supply plan is more critical than ever. New propane export capabilities and higher demand and prices for propane overseas now means that surplus propane can be shipped away during the summer as traditional heating demand abates while production continues at a steady pace.
The challenge of transportation: Marketers must decide whether to own their own transportation assets, to subcontract this role to outside contractors, or to have a blend of the two. If subcontractors are used, they must be assessed for reliability and performance just as core propane suppliers. If a marketer needs extra propane to meet seasonal or emergency demands, it may need to travel long distances to obtain it. Marketers should have discussions with carriers about the potential for traveling to distant storage caverns or other supply points if the need arises.
Storage, another major issue: Storage is encouraged at major primary storage facilities, which generally consist of underground salt domes or caverns that serve as main repositories for propane storage in the U.S. Because these facilities have tremendous scale economies, primary storage is generally less expensive on a per-gallon basis than bulk plant storage.
Buying liquid propane in primary storage has a two-fold effect. It offers protection for supply needs, but it also serves as a long hedge, meaning that the price of the product is established in advance of its anticipated need. Of course, locking in the price can have both a positive or negative outcome, depending on whether the product price moves up or down at the time of retail sale.
Marketer plant storage is an asset that may be needed in higher volumes in some areas than others. Marketers near major propane storage centers or pipeline systems may not need as much plant storage as those far away from such facilities. Many marketers see storage as a key strategic asset, offering both the opportunity to store gas at favorable pricing and the ability to withstand short-term supply shortages with a cushion of extra propane.
Customer storage, or tertiary storage, is an important part of the supply situation. A study released by PERC in 2011 estimated that there was 111 million barrels, or approximately 4.7 billion gallons, of customer storage in the field, nearly equaling the total amount of primary storage capacity in the U.S. The study also concluded that the average tank size for domestic customers was 400 gallons. The sheer volume of customer storage in the field underscores the importance of filling customer storage prior to peak season demand.
All marketers are urged to implement programs aimed at ensuring customers are full prior to peak demand. Areas of focus should include: eliminating “will call” accounts; creating budget/pre-pay/or metered programs to eliminate credit concerns; offering promotional pre-season fill rates; and working customers on scheduled routes
The Working Group notes that while there are challenges to modifying established practices and consumer behavior, one great benefit of succeeding with these changes is that they have the effect of increasing supply capacity with no additional capital investment.
The highlights presented here are not inclusive of all recommendations by the NPGA Working Group. The document can be found by NPGA members at npga.org. — Pat Thornton