Reinforcing the Supply Chain

by John MacKenna

Crestwood seeks approval for underground LPG storage

Domestic supplies of propane are plentiful, but logistical problems have created price and supply risks in the Northeast and Midwest that could haunt marketers and their customers in the event of another winter like the last one.

An increase in regional storage capacities would go a long way toward stabilizing supply and price in the constrained regions, according to the National Propane Gas Association (NPGA), but that is easier said than done.

One project that NPGA sees as critical for both regions is Crestwood Midstream Partners’ proposed 2.1 billion barrel LPG storage facility in Watkins Glen, in New York State’s Finger Lakes region. Crestwood would market propane that is produced in the nearby Utica and Marcellus shale regions, delivered mostly by the Enterprise TE Products (TEPPCO) Pipeline, and stored for winter use in underground salt caverns.

Gaps in the Supply Chain

The Northeast currently lacks the propane storage necessary to prevent price spikes during periods of elevated demand, and the existing delivery infrastructure cannot supply propane immediately to meet the need. Since propane is not produced in New York or New England, it must be transported into the region via the TEPPCO Pipeline or by trains, trucks and ships. The propane brought in by ships tends to be very expensive relative to U.S. production, because buyers must compete in the world market where prices are much higher.

Last winter, the gaps in the Northeast and Midwest propane infrastructure were exposed when demand rose due to heavy crop-drying demand in the Midwest followed by more than a month of widespread, severe cold weather. Crestwood has estimated that existing delivery constraints, together with increased propane exports, created an 81.4 million gallon propane shortfall in New York State alone. Forced to rely on higher-cost delivery alternatives, the average propane customer in New York State paid $411 more for propane than they would have if the Crestwood facility had been online, the company estimated. The combined cost burden on New Yorkers exceeded $100 million, according to Crestwood.

NPGA believes primary storage facilities like Crestwood’s provide essential flexibility in the supply chain. “A fundamental fact is that propane, like natural gas, is produced in basically the same amount every day all year long,” said Jeff Petrash, NPGA’s Vice President and General Counsel. “But in the non-petrochemical sectors it is consumed in a highly seasonal way, so what members do is to rationalize the difference between how it is produced and the way in which it is consumed. Storage is a critical way of doing that. Storage can also fundamentally replace increasing the size of pipelines and other infrastructure. It really is critical.”

The geographic location makes the Finger Lakes facility particularly important, because it can work as a reserve for New York, New England and, to a lesser extent, Pennsylvania and the Mid-Atlantic region, according to the NPGA executive. During last year’s brutal winter, the Crestwood facility would also have taken pressure off storage facilities such as Marysville, Mich., and Sarnia, Ontario, that principally serve the Midwest. Other options to the west of Finger Lakes are limited because there are few if any areas of underground salt deposits similar to upstate New York, Petrash said.

For customers in New England, the Finger Lakes facility could have reduced LPG costs considerably. “Even in last winter, which was one of the highest demand winters ever, Crestwood is large enough to have offset every gallon of propane imported from Europe and Africa,” said Joe Rose, President of the New England Propane Gas Association (NEPGA). Suppliers imported more than 70 millions gallons last winter and sold it for about $1 more per gallon than domestic propane. “We paid a large premium for that, so it cost the citizenry, by not having Crestwood available, about $70 million last winter.”

The Finger Lakes facility is particularly attractive to marketers in New England, because it is on the TEPPCO pipeline, so product reserved in the Watkins Glen salt caverns can be picked up at Selkirk, N.Y., Rose said.

Approval Is a Challenge

While the region-wide benefits of improved propane storage are apparent, local political considerations can be a formidable obstacle to permitting, particularly in the Northeast. Thousands of homes in New York and every neighboring state depend on propane for winter heating, but homeowners – and their retail propane suppliers – generally stay out of the public debate over new energy facilities.

Instead, the permit application process becomes a forum for environmentalists and advocates of competing energy sources to press their agendas and build support for their causes. Regional propane projects like Crestwood’s are particularly vulnerable in this process, because the permitting bodies are generally at the state and local levels. As such, they tend to be highly responsive to aggressive public input and impervious to regional considerations from beyond their immediate jurisdictions.

Crestwood’s experience since it first applied for permits in 2009 is familiar to numerous energy suppliers who have sought to build or expand their facilities, including terminal operators in South Portland, Maine, and propane wholesalers in Newington, N.H., and Clinton, Conn.

NPGA’s Petrash believes the energy industry, from utilities to independent marketers, has performed so reliably through the years that customers do not appreciate the need for energy infrastructure. “The overarching issue is that people want their furnace and their flat panel TV, but then they don’t want the infrastructure that is essential to deliver that. This is a cross-cutting issue across all energy sources. The energy business has been so successful that it is beyond people’s imaginations. They think it’s automatic. The thermostat works, and you stay warm, and homeowners have no clue of the massive, complex infrastructure behind that.”

The pattern has been repeated in the Finger Lakes region, with Crestwood coming up against a coalition known as Gas Free Seneca (GFS), which formed in 2011 to oppose the underground storage plan. Drawing its support largely outside the Finger Lakes region, GFS has aggressively opposed the proposed facility by packing public hearings and exploiting the permitting process to delay the project. In 2013, pro-environment law firm Earthjustice agreed to represent GFS. The groups have lately recruited the Finger Lakes region’s wine growers in its public relations campaign, suggesting that gas storage would be incompatible with wine tourism.

Despite the opposition, Crestwood received a Nationwide Permit from the U.S. Army Corps of Engineers in 2012 certifying the project as having minimal environmental impact. (The storage facility would be located at Crestwood’s US Salt complex, which currently supports salt production and natural gas storage operations today.) Final say on the project rests with the New York State Department of Environmental Conservation (DEC), however, and that has proved a very difficult hurdle to clear.

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