Propane and natural gas industries prepare for next winter

03/18/2014 11:52 AM

03/18/2014 8:06 PM

This winter showed that natural gas prices can still bite, but not as deep as propane’s price spike.

But what about next winter?

That’s a question being mulled over by the two industries and energy experts. Propane customers saw prices on some days that were at least twice as high as what they paid earlier in the winter. Those prices are now off those highs but still about 50 percent higher than a year ago.

The propane price surge roiled not only consumers who were paying hundreds of dollars more to heat their homes but also the industry, which is pledging to unveil plans to avoid spikes next winter.

“In the 100-year history of propane, we never had anything like we had this winter,” said Mollie O’Dell, a spokeswoman for the National Propane Gas Association.

By comparison, natural gas had more modest increases. But the market remains volatile, with prices on the New York Mercantile Exchange this month briefly spiking above $5 per 1,000 cubic feet.

Heating bills were much higher this winter as frigid cold increased consumption about 28 percent compared with last winter.

Still, this year’s gas prices were considerably below what was paid as recently as 2009 and 2010. Wholesale gas prices in 2009 were routinely above $6 per 1,000 cubic feet, with some spikes reaching $7. But huge supplies of gas coming from shale rock formations pulled prices down, and a couple of warm winters put them lower still.

But with gas production now essentially flat, prices are becoming more sensitive to a jump in demand from colder conditions, said James Williams, an analyst for WTRG Economics, which follows energy markets.

“We were spoiled by warm winters and rapidly rising production,” he said. “I think we are returning to more normal price behavior.”

This winter will have a lingering effect on prices, experts said. The high demand left natural gas in storage at its lowest in a decade. Replenishing inventories will prop up prices and keep them from falling the way they did a couple of years ago when a warm winter left the country with a big stockpile of the fuel.

The use of natural gas to generate electricity in the next few months also will have an effect. Deepa Poduval, a principal consultant at Overland Park-based Black &Veatch, said expectations of a warmer than normal spring across the southern part of the United States could push demand for power.

But will a higher price for natural gas stall the trend of electric utilities using more of the fuel? Poduval said it could have some short-term effect, but the longer view is that gas prices will moderate after a correction for the recent weather and with some increased gas production.

“This will support a continued shift towards gas in electric utility portfolios,” she said.

Propane’s historic winter still has customers reeling. In November, average residential prices were $2.40 a gallon before they began their climb, topping off at $4 in late January and early February. By early March, they were down to $3.33, according to the Energy Information Administration.

Propane in some hard-pressed areas cost as much as $7. The supply chain, including distributors, marketers and consumers, saw hefty bills.

“A lot of people owe a lot of money,” said Greg Noll, executive vice president of the Propane Marketers Association of Kansas.

Several state attorneys general, including those in Kansas and Missouri, are investigating the high prices and whether there was anything illegal.

Regardless of the investigation, some changes in how the fuel is sold appear likely.

The National Propane Gas Association has established several task forces and expects to have recommendations by summer.

“Everything is on the table,” said O’Dell.

There were signs early in the winter that propane was in trouble. A late and wet corn crop reduced propane supplies since the fuel is used for drying grain. Then a pipeline was temporarily offline, hurting efforts to get more of the fuel. Then the colder than normal winter hit.

Many in the industry believe what happened was mainly a logistics problem in trying to get enough propane to where it was needed. Measures relieving that problem helped. Several states, including Missouri and Kansas, relaxed rules limiting the number of hours that drivers of propane trucks could be on the road. The federal government issued an emergency order getting more pipeline capacity for propane.

But the propane association’s task forces are going beyond that, including looking at any effect propane exports may have had on U.S. supplies.

The industry is also reviewing the long-held custom of periodically and routinely filling customers’ propane tanks. Many dealers told their customers that they could skip a fill-up or buy less. But some propane customers say they got fill-ups at peak prices, resulting in bills in the thousands of dollars.

Propane storage is especially getting scrutiny.

“You can’t control Mother Nature, so we need to be the best prepared you can be,” said Noll.

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