Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
Propane Exports Under Fire
Feb 14, 2014
I wrote critically about the impacts of rising propane exports in my Friday blog a few weeks ago and took some heat for it. It is true that export policy has the power to make or break an industry. Echoes of the Jimmy Carter Administration's policies and the disastrous effects of grain export embargoes on America's agricultural sector rippled through discussions here at the Monitor.
A colleague of mine reminded me, "This is still America and we have to be careful when we say to a company they can or cannot make money in this or that way." The fracking boom gave American energy prospects a shot of adrenaline but the seemingly endless supplies of crude oil and natural gas limited returns for producers.
As drought minimized agricultural propane use for grain drying in 2011 and '12, natural gas liquids (NGL) producers were stuck sitting on a wealth of possibilities, with very limited upside price potential. When NGL producers found customers on the global market, they were anxious to finally move some product and turn a decent profit on the shale -- and rightly so.
Bad timing --
But the shift to exports was timed poorly. Two or even three years earlier would have hit it just right. This year, however, marked a springtime shift from the chapped crocodile soils of drought, to saturated soils and ponding in fields across much of the Cornbelt. Strong summer winds created stand issues in corn; early snows forced harvest to put the pedal to the metal; winter was on its way and the early October cattle kills in South Dakota now look like a grim warning from mother nature.
According to a Reuters article, "Data from the Energy Information Administration showed that coming into the winter, propane exports rose to 410,000 barrels per day (bpd) in November, the highest since the agency began collecting data four decades ago. That figure eclipsed the 408,000 bpd exported the previous month, which in itself was a big jump from the 270,000 bpd that had been exported on average in the previous months of 2013. And some analysts say that this high export level had been more or less maintained throughout December and January. Energy consultants RBN Energy, citing fellow consultants IHS Waterborne Energy, said exports barely dipped below the 400,000 bpd mark in the past two months and, according to their chart, have stayed above the 375,000 bpd mark."
Current national inventories are roughly half of what they were at the same time last year. Agricultural demand was pegged at harvest four times above a 'typical' year. But exports have ballooned at the same time from 5% of the national supply in 2008 to 20% of the national supply in 2013.
Help is on the way --
This month, supplies positioned in Cushing, Oklahoma were sent back northward to Conway, Kansas for domestic distribution. Just this week, the Federal Energy Regulatory Commission (FERC) took historic steps to prioritize 21 million gallons of propane pipeline shipments to the Midwest. The U.S. Department of Health and Human Services has also released $450 million for low income home heat assistance to combat the price spike, but these are band-aid solutions.
Our takeaway from this depends on our position. Propane sellers have hit the demand motherlode -- strong domestic demand parallel with strong export demand. We can call this year a mulligan or blame unpredictable weather for price spikes and local shortages. It is true, that until that October snowstorm, we really had no clue how severe this winter would be. They did not expect ice in Atlanta and Dallas, but they got it anyway.
From the end user perspective, the importance of contracting LP at seasonal low prices is refreshed. This not only locks in your price at a demand low, but it also helps your supplier pencil in projected needs for the season ahead. I wrote in a white paper recently that on the farm, there are worse ideas than considering alternative home heat solutions like wood burning stoves and fireplaces.
Chip read my piece and asked, "Are you seriously saying to these guys to go out and chop wood?" In homes that have fireplaces or wood burners, the answer is absolutely yes -- maybe get the neighbor kid to do it. It is dangerous to be so tied to the grid that we cannot heat our homes and farms without the support of propane deliveries or electricity. A backup plan is never a bad idea, especially if next winter is as cold as this one. I grew up with a kerosene heater glowing in the living room through the winter, and I know it gave our family a small measure of independence and security through some cold nights.
To discourage propane exports would hamstring the industry when global marketings are starting to gain momentum. It is time for American natural gas to put its money where its mouth is, however. A wealth of shale reserves does us no good if it cannot answer domestic demand for winter heat. From what we have all been told, there is enough shale gas to fuel us to the moon and back. Now that natgas and other NGLs have gained some price strength, the incentive is there for LP producers to refill U.S. inventories.
We do not have to embargo the export of propane, and we should not. We can all learn from this winter's propane problems and with any luck, as much attention will be paid to storage levels and agricultural demand as to export demand in the future. There are many exporting nations who send out product only after domestic needs have been filled generously. The United States must adopt a similar policy that makes domestic demand a priority over export shipments.