We subscribe to BPN magazine in our office and I noticed this week’s cover and I was instantly put into a bad mood:
It says: NEVER AGAIN: Addressing Supply Issues on Capitol Hill
I’ll say right here that my opinions are just that; they are mine and represent no one other than me.
First of all, there is next to nothing anyone in the industry could have done last year, had they known all of the factors that lay before them well in advance, to avoid some of the price spikes and nearly all of the supply challenges we experienced.
If every tertiary tank in America was full in November heading into the winter, we still would have had challenges…Now, one thing that could have been averted with that foreknowledge would be people would have paid a lot less for more gas as they would have taken longer prebuy positions, and in certain areas of the country (namely the Southeast) that would have made a huge difference because there isn’t a great deal of prebuy that takes place there compared to other regions.
Last winter was a disastrous confluence of gigantic demand factors:
*Late corn planting led to a late harvest and the corn was wet. Propane usage for grain drying was 300% higher than the previous year. Now how in the heck can anyone account for that? I am talking people who do this every day for decades on end can’t account for that. The grain drying year of 2009 nearly crippled the industry. Infrastructure is the problem and a politician can’t fix that.
*Then on the heels of that monster demand increase and before anyone had a chance to collect their figurative breaths, one of the worst winters in a quarter century hit the eastern two-thirds of the nation….and its icy grip was felt from the Dakotas into southern Georgia.
Conway, Kansas, the primary storage hub in the Midwest (it is to the Midwest what Mt Belvieu is to the TET and Dixie pipelines) effectively was out of propane in mid-January. Not surprisingly, given this doomsday scenario playing out for just the second time ever (Conway being empty), prices shot through the roof.
Truly in the end (for the most part, except for some funny business on the Dixie in January), good old supply and demand was the primary driver that has powered the American capitalistic system for over a century. Exports were a huge part of this too, as inventories did not build to normal levels, but even normal levels would have struggled to hold up under the stress of 300% increases in grain drying and a historically cold winter.
You can read the article in the BPN at his link, in its entirety. For the most part, I feel like any interaction with politicians, especially in an election year and when your visit to Capitol Hill comes when congress is in recess, is a pointless exercise. Nonetheless, here were some highlights from that item:
“This sheer volume of customer storage in the field underscores the importance of filling customer storage prior to peak-season demand,” the report highlights. The Working Group urges all marketers to implement programs aimed at ensuring customers are full prior to peak season. 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 including customers on scheduled delivery routes.”
Having both your storage tanks full and your customer tanks full heading into winter is a huge chip for you. But not everyone can do that due to cash flow challenges that affect everyone. If you can swing it, do it.
This next item from the article was the most salient point in my opinion, even if there are no magic bullet solutions to the problem:
“First, shale production is taking over assets: transports, railcars, and pipelines traditionally used by the retail propane industry to move product during supply shortages. Therefore, as an industry we have lost flexibility to move propane to areas of need quickly. Second, shale production, primarily because it is attractively priced versus traditional supply, can lure the marketer away from engaging in, and then performing on, traditional supply contracts.”
The biggest problem facing the propane industry right now, in my opinion, is logistics. Our pipeline system has finite capacity and during cold winters we have always had to overcome challenges to get the gas where we need it when we need it. This is nothing new. But there is a perception that because of the shale gas boom, we will be awash with propane and our worries are over.
That’s a false premise and a dangerous assumption.
I market on the three major pipelines as well as marketing out of a ‘shale’ terminal in Scio, OH. I enjoy working in every region as I feel that gives me informational and analytic advantages that directly or indirectly are passed on to my clients.
NGL is responsible for marketing the majority of the propane out of the Scio, OH facility which is a monster production facility within the Marcellus/Utica shale play.
There is a lot of propane there…but is it going to get to you in Iowa or Illinois, North Carolina or Georgia?? Maybe if you have a rail terminal, but most people not only don’t have their own spur, they have no access to a spur. There will also be a finite amount of that shale supply that will be rolling right through your area from either the Bakken fields or the Marcellus/Utica on railcars, headed to the Gulf for export. Pipelines are being funded for production from these shale fields to Mt Belvieu for export.
If you live very near a shale gas production facility, you’re in a good position. If you’re not, the shale boom is really nothing more than a news headline right now. Until there is enough gas that can bring calm to all of the markets, it really doesn’t matter to you.
For this coming winter, that is the case; it won’t really matter to the supply scenario of folks in the Dixie or upper Midwest. Those in Indiana, Michigan, Ohio, Pennsylvania, etc, will likely have a much easier time this year than last winter; I was arranging trucks for people in Ohio and sending them to Kansas! They won’t have to go that far this year.
But for everyone, be as prepared as you can. With the delay of El Nino, I grow more concerned about another harsh winter. El Nino’s arrival would lessen those fears somewhat, but a double whammy of a big grain drying year and cold winter are definitely not long shots. Having a plan to see your customer tanks filled before the winter is a good strategy regardless of your geography. Having your storage tanks full in advance of your demand times are of paramount importance. It seems elementary to say that, but some folks felt the pain of having not done that last winter.
I can’t imagine having another year like last year, but even a winter 70% of last winter would be another big challenge for us all. Control the things you can…unfortunately in the end, those are too few and far between and politicians in Washington, who really know little to nothing of the nuances of our industry, aren’t going to save the day…the logistical problems can only be approached by private investment and time. That’s my two cents, at least.
I don’t say this enough, but I’d love your feedback on this post or anything that I make. I’d love to include some ‘reader comments’ as a sort of mailbag post in the future. You have my word that your comments would be quoted anonymously, but even then I would only use them with your expressed permission.