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Strengthening the LPG Supply Chain

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By John MacKenna

 

The National Propane Gas Association (NPGA) is developing a far-reaching set of initiatives and solutions to help distributors throughout the chain prepare to meet periodic supply challenges.

In the wake of the 2013-14 winter, when severe propane shortages developed in the Midwest and Northeast, NPGA created the Supply and Infrastructure Task Force. The panel was tasked with studying the events of last winter to find what went wrong and what changes can be made to prevent future shortages. Oil & Energy recently reached out Task Force Chairman Tom Van Buren, of Ferrell North America, to discuss propane supply and infrastructure.

“The Task Force was constituted at the NPGA Board Meeting in February with the mission of evaluating the causes of what happened as it relates to the supply and distribution chain and consider what we can do to improve the distribution chain while positioning our industry to be more proactive in coordination with state and federal government and industry partners,” Van Buren explained.

He said last winter’s regional shortages were caused by a combination of weather and logistical problems and do not reflect overall shortages in the U.S. propane supply. “The winter we had was unprecedented and as challenging as it ever could have been, because of all the things that happened at once,” he explained. “It was a wake-up call for all of us that we have to focus in on areas that previously may not have been considered with all the production and infrastructure changes from the last few years.”

Last winter’s shortages were driven largely by exceptional demand. The first surge arrived during harvest season, when heavy rains forced farmers to increase their use of propane dramatically in order to dry their corn. Not only was the crop-related demand higher than normal, it also occurred relatively late, which left Midwest suppliers short when the weather turned cold.

The second wave came when the “polar vortex” settled in across the U.S. Midwest and the Northeast, bringing week after week of exceptionally cold weather. “The cold weather was sustained for a long period of time over multiple areas, so there was never an opportunity to restock,” Van Buren said.

Reversals and Outages

Regional circumstances also combined to hinder distribution. Pipelines and other assets were diverted to support production and demand changes; a previous large winter supply storage source at Todhunter, OH was unavailable; and there were a number of refinery and gas plant outages in the heart of the winter, he noted. “Despite the cold, you expect to be able to lift X amount from a supplier, and to have that not available for a week is a problem. You could go to the next location, but that might already be on allocation. Most supply points were on allocation or restricted, so then any businesses that did not plan – and even those that did plan – were impacted and needed to go to resources at a far greater distance, and that put a huge strain on logistics support.” Transport capacity was already reduced due to heavy shale gas-related activities, and many suppliers were maintaining storage levels reflective of recent warmer winters.

The industry might have been able to ride out the supply surges under ideal circumstances, but the realities were far from perfect. Supply in Minnesota and the upper Midwest was already compromised by the pending reversal of Kinder Morgan’s Cochin Pipeline. Instead of supplying finished propane to Minnesota, the Cochin is now reversed to carry light condensate into Canada. Preliminary work that preceded the reversal was already under way in late 2013 leading to a three-week outage from Thanksgiving to mid December, and marketers were forced to tap other supply sources when demand began to surge, according to Van Buren.

When the polar vortex created a demand surge across multiple regions that did not relent for weeks on end, regional shortages developed that proved difficult to relieve because demand was very high across many of the northern states. Some retailers and customers were unable to secure supply, and the prices soared. Governors in many states from Maine to Wisconsin declared emergencies in order to lift restrictions on fuel transportation and delivery.

Looking Ahead

The NPGA Task Force is working to help the industry avoid a repeat of last winter’s problems. It is focused on six specific areas relating to the supply chain: infrastructure and distribution; exports and national inventory analysis; the impact of the Cochin Pipeline reversal project; industry/marketer education; public relations; and consumer education.

During the spring and summer, the Task Force has focused primarily on marketer education, public policy, and a “game plan” for future winters to ensure that the industry is prepared to meet whatever challenges occur. “We’re putting ourselves in a position to be proactive instead of reactive,” Van Buren said.

Marketer education is an important piece of the solution, and NPGA in May issued recommendations for marketers on how to keep customers in supply. NPGA has disseminated a white paper on the subject to marketers.

NPGA and its allies have already secured an important policy victory with the passage of the Reliable Home Heating Act, which authorizes state governors to declare emergencies and temporarily waive transportation restrictions to facilitate the movement of propane and heating oil. It also requires the Director of the U.S. Energy Information Administration to notify governors whenever fuel inventories in their region fall below the most recent five-year averages for more than three consecutive weeks. “That’s very helpful for being proactive and coordinating with the states,” Van Buren said.

NPGA might also seek changes in the federal Low Income Home Energy Assistance Program (LIHEAP) to require earlier disbursement of funds, so that marketers can get propane into customers’ tanks before cold weather speeds the pace of demand.

Supporting Regional Projects

Another area where the Task Force sees opportunity for improvement is in regional storage and logistical infrastructures. The group is recommending that NPGA increase its support activities for regional projects, such as Crestwood’s proposed Finger Lakes propane storage facility in upstate New York, which would store up to 88 million gallons of propane that would help prevent shortages. Crestwood merely needs the governor’s signature to start construction, but Gov. Andrew Cuomo has refused to approve the facility for five years.

“Because of the interconnectedness of supply, a facility like Finger Lakes is not just a regional issue but a national one,” Van Buren said. “The Task Force recommends that our industry move forward with more support to raise awareness of these infrastructure changes and the benefits.” The Finger Lakes facility has been environmentally reviewed and is shovel-ready, and the supply would have helped meet demand in the Northeast this winter as supply and logistics from surrounding states needed to help supply New York, he noted. “To have that available to flex and meet demand for region would have a great positive impact.”

NPGA can also work with railroads to ensure that propane cargoes get high-priority treatment when cold weather causes demand surges, he said.

The propane industry will always be subject to demand increases caused by extreme cold weather and wet harvest seasons, and the Task Force is working with the operators of pipelines and terminals to encourage more regional storage and higher load rates.

Another relief point that marketers can tap into is customer storage. By promoting keep-full policies and other changes at the customer level, marketers can fill customer tanks ahead of cold weather. As this winter demonstrated, marketers who are running backlogs on customer fills cannot help a will-call customer who waits until their supply is almost gone and calls looking for a same-day fill. The Propane Education & Research Council recently approved a program to focus on consumer safety preparedness, Van Buren said.

He also recommends that marketers sell propane autogas and market propane for lawnmowers so that they can sell more in summer and build their allocations.

“We want to stress that there is plenty of propane available for domestic use,” Van Buren said. “The key is looking at the regional dynamics and making sure the supply is available where it is needed on an ongoing basis.” The Task Force recommends, at minimum, an annual review of regional changes to make sure the industry is proactively addressing supply challenges as there will continue to be significant infrastructure changes with increased production and new export activity.

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