Propane suppliers, after crisis last winter, are better prepared

08/25/2014 9:21 PM

08/25/2014 9:21 PM

The propane industry, after months of regrouping, is nervously optimistic about the coming winter.

The U.S. produces twice as much propane as it uses, but getting the fuel to those who need it was the system’s Achilles’ heel last winter. Shortages and soaring prices added up to the country’s worst propane crisis in a century.

The distribution system was overwhelmed by a confluence of events that caused demand to soar. It started with a large corn crop with high moisture content, so more propane than usual was used to dry the grain so it could be stored. Then a colder than normal winter boosted demand further from homes and businesses that heat with propane.

That increased heating demand devastated stockpiles, which were already low, especially in the Midwest. Prices for a time more than doubled amid frantic efforts to replenish supplies.

The pain was mainly felt in small towns and rural areas that depend on the fuel. In Kansas, propane provides 17 percent of the heating for homes. In Missouri, it’s 25 percent. Those percentages are higher than surrounding states such as Iowa and Arkansas.

The propane industry believes lessons were learned and changes made that will help this winter. Those range from an early warning system with the Energy Information Administration providng updates to the state governments. Emergency propane shipments should be easier with speedier approvals for allowing longer hours for propane truck drivers.

Propane stockpiles are also higher than a year ago, though the U.S. does export substantial amounts of what it produces.

“It was a wake-up call,” said Greg Noll, executive vice president of the Propane Marketers Association of Kansas. “If it’s another year like last year, we should be much better prepared.”

But there are nagging worries that another supply crisis — and price spike — could still happen if a similar winter and corn crop hit again. One early sign: This year’s corn crop is expected to be even larger than last year’s, although the moisture content won’t be known until closer to harvest.

As for heating demand, the National Weather Service will release its winter forecast in mid-September. AccuWeather, a private forecasting company, recently said it expects fall temperatures to be below normal in the Midwest and normal in the Northeast.

But if there is heavy demand for the fuel, the propane industry could be tested again.

“The system is still vulnerable to stress and disruption,” said Bill Gautreax, president of the liquids and crude unit at Crestwood, a Kansas City company that gathers, stores and transports liquids such as propane.

About 1,800 gallons of the fuel, a byproduct of crude oil and natural gas, is needed to heat an average home in a typical winter. A fill-up of a residential propane tank during a price spike can easily cost a family hundreds of dollars more. Retail prices briefly passed $5 a gallon last winter although some consumers had locked in much lower prices in contracts with propane dealers.

The fuel has gone through some price spikes in the past, and not always strictly because of supply and demand. In 2007, oil giant BP agreed to pay $303 million to settle a federal regulatory complaint about price fixing. A company employee turned whistleblower accused the company of cornering part of the propane market to raise prices.

“There continues to be an unreasonable assumption that market forces are always a rational reason for price spikes,” said Tyson Slocum, head of the energy program at Public Citizen, a consumer group.

Last winter’s price spikes spawned several state investigations, but so far they haven’t come up with much new information. In Missouri, several propane customers complained about emergency delivery fees or not having contract prices honored. The state’s attorney general said $3,000 had been recovered by June.

“While our investigation concludes that market forces drove higher propane prices, we are still actively responding to complaints from Missouri propane consumers” case by case, Attorney General Chris Koster said at the time.

Last year’s problems in the Midwest started when stockpiles were well below average, providing less cushion for any demand surge.

“If you don’t have enough inventory you’re going to strain the distribution system,” said James Williams, an analysts for WTRG Economics, which monitors energy markets.

Stockpiles have improved somewhat this year. The federal Energy Information Administration said supplies are still below below a five-year average in the Midwest, but they have begun to catch up. They are now about 10 percent higher than a year ago.

Mason Hamilton, an analyst for the Energy Information Administration, said the propane is being added to a big storage facility in Conway, Kan., and in additional tanks at wholesale terminals.

But a major storage facility in Ohio is not available because of leaks, and a pipeline that for years delivered propane from Canada to the Midwest is slated to be used to transport another petroleum product instead. Plans call for other pipelines to take up the slack, but it’s unclear whether that will be enough. A Minnesota company is rushing to build more storage to offset part of what is being lost from the pipeline.

Gautreaux said not enough attention had been given to local infrastructure, which must be addressed to really fix the problem. Much of the investment that has been made had gone to supplying a Texas propane hub which helps feed the propane export market.

His company has been trying for five years to build a 2.1 million barrel storage in upstate New York, but it has been delayed by local opposition. Such a facility would have benefited the Northeast last winter and, because shortages in one region ripple through to another, the Midwest as well.

Someone should also be reviewing the loss of pipeline capacity and ensuring that the lost supplies can be replaced, Gautreaux said, but “no one is doing the diligence.”

Meanwhile, propane retailers are trying to do what they can. Chris Klein, manager of AV Energy in Dodge City, said about half of his propane customers have locked in prices. That’s double the number who signed contracts last winter, but he’s surprised it wasn’t more.

“No one thinks about propane when it’s 100 degrees outside,” he said.

AV Energy is keeping its terminal tanks full and advising customers not to let theirs get too low.

The National Propane Gas Association, a trade group, made recommendations after last winter and is seeing some of them fall into place while others will take longer.

“It’s fair to say we dodged a bullet last year,” said Jeff Petrash, a vice president at the trade group. “We’re pulling all the levers.”

To reach Steve Everly, call 816-234-4455 or send email to severly@kcstar.

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