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While supply is improving somewhat, we understand that everyone has been concerned about the Midwest propane shortage; therefore, we want to try to explain what has been going on. Below, we have included more lengthy explanations of the situation by the EIA (U.S. Energy Information Administration) and the NPGA (National Propane Gas Association). For those that would just like a short summary, please read the following paragraph.
The United States oil & gas industry is producing more oil, natural gas and propane than it ever has. The problem is that the propane can’t get to the right places fast enough. First, there are not enough pipelines to carry the newly abundant supply. In addition, some current pipelines are being reversed or diverted to other areas of the country. In Michigan, we have had our own unique pipeline issues. According to a major supplier, "Marysville Underground Storage Facility has served as a major source of propane supply for Michigan. This terminal is re-supplied by propane shipped down the Cochin Pipeline from western Canada. The Cochin Pipeline terminates at Windsor, Ontario. Then the propane is shipped up the EDS Pipeline in Corunna, Ontario. The Genesis Pipeline then delivers this propane from Corunna into Marysville. Genesis has shut down this pipeline...There are now barrels of propane that were intended for Marysvelle that are stranded in Corunna." Second, rail-cars can be used to transport propane around the country, but there are only so many rail-cars. Crude oil is using a significant number of rail-cars (the industry used 11,000 rail-cars for transportation in 2009 and 234,000 in 2013). Third, propane will generally flow to the highest bidder. The Northeast has been willing to pay more in past months, so therefore, some of the propane that would have normally stayed in the Midwest went to the Northeast. Countries in South America are willing to pay a very good price for U.S. propane. It is exported to South America via Gulf Coast ports. Prices increase when supplies are low. In this case, the Midwest is trying to attract more propane to the region by paying more for it. Lastly, we have consumed more propane in the Midwest this heating season than normal due to a late, wet grain and corn harvest (farmers reduce moisture contents of their harvests with propane) in November and historical low temperatures. Please see below for more details and in-depth explanation.
Letter from NPGA (National Propane Gas Association) to Anthony Foxx, Secretary of the U.S. Department of Transportation:
“While the overall supply of propane in the United States is more than adequate, what the propane industry is facing are challenges related to the fuel's distribution and transportation. These current challenges in meeting consumer demand result from a number of coincident factors, which include:
From the EIA weekly summary released January 15th:
“At the beginning of November, the corn harvest in the Upper Midwest (Minnesota, Iowa, Wisconsin, Nebraska) pulled large quantities of propane from distribution terminals for corn drying. Between late-November and December, supply disruptions prevented these terminals from replenishing their supplies of propane. With the onset of severely cold weather this past week, propane supplies are extremely tight, forcing emergency measures to ensure supply and increasing the Midwest spot price of propane at Conway, Kansas compared with the spot price on the Gulf Coast at Mont Belvieu, Texas. Propane prices in the Midwest will likely need to rise to keep propane in the region rather than flowing south to the Gulf Coast.
In October, EIA noted the effects of increased production of domestic oil and gas on propane flows between the Midwest and the Gulf Coast. Infrastructure changes have allowed the growing supplies of propane and other hydrocarbon gas liquids (HGL) from increased production to flow south from and through the Midwest to supply Gulf Coast petrochemical demand and also to gain access to the global market. Recently, the onset of severely cold weather in the Midwest has increased regional demand for propane and other heating fuels.
Even before the recent cold snap, Midwest propane markets were relatively tight compared with those on the Gulf Coast for other weather-related reasons. In addition to space heating needs, the Midwest uses propane for agricultural applications such as corn drying. For corn to be stored, it first needs to be dried, using large-scale heaters that often use propane for fuel. A late-2013 corn harvest, along with cold wet weather, resulted in strong demand for propane at distribution terminals in the Upper Midwest. For the week ending November 1, Midwest propane inventories dropped more than 2 million barrels, the largest single-week stock draw in November since 1993. This demand prompted a strong price response, and propane at Conway moved to a 3-cent-per-gallon (/gal) premium over Mont Belvieu during the first week of November, the first such premium in almost three years.
After the harvest, logistical problems prevented the region from fully replenishing inventories before the onset of winter. The Upper Midwest is supplied with propane by pipelines (Mid-American and ONEOK) flowing north from Conway (home to 30% of the nation's propane storage), the Cochin pipeline coming south from Canada, and from rail deliveries (Figure 1). The Cochin pipeline, which delivers HGL from Canada to the Upper Midwest, was out of service for maintenance from late November to December 20 and unavailable to deliver supplies. Rail transportation disruptions, both due to weather and other factors, prevented deliveries from Mont Belvieu and Conway, as well as from Canada.
Since early 2010, propane prices at Mont Belvieu, the nation's largest propane storage and market hub, were higher than at Conway by as much as 30 cents/gal, prompting propane supplies to flow south on newly expanded southbound pipelines. A large local petrochemical demand and access to the global propane market via expanded HGL export capacity supported Mont Belvieu prices and encouraged propane from the Rockies (PADD 4) and elsewhere in the Midwest to flow south.
Low temperatures and winter storms closely followed the corn harvest, and logistical problems continued. The colder weather increased residential space heating demand at a time when markets were already tight. As demand outpaced supply, inventories dropped further, by 1.5 million barrels and 1.2 million barrels for the weeks ending December 6 and January 3, respectively.
Strong back-to-back demand surges, low inventories, and supply challenges forced emergency measures to ensure residential adequacy of propane. Several Midwestern states responded by suspending limitations on hours of service for propane delivery truck drivers. Trade press reported long waiting lines at propane distribution terminals in the Upper Midwest, as well as supply of propane by truck from as far away as Oklahoma. Since the week ending October 11, Midwest propane inventory levels have dropped by 12.8 million barrels, compared with a drop of 7.3 million barrels for the same period's five-year average.
Because global prices for propane are significantly higher than U.S. prices, propane supplies will continue to move to Mont Belvieu for export. Midwest propane prices will rise to keep marginal supplies in the region when they are needed.
The Midwest will also need to prepare for the coming reversal of Kinder Morgan's Cochin Pipeline, which delivers HGL from Canada to the upper Midwest. Kinder Morgan plans to reverse the flow to deliver light condensate to Canada. This reversal will change supply dynamics in the Midwest. However, this situation may also improve the economic prospects for infrastructure projects to process and transport HGL from the Bakken formation in North Dakota and Montana to Midwest markets farther east.”
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