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posted: 11/24/2013 7:02 AM

Propane boom pits U.S. exports against home heat

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Bloomberg News

HOUSTON -- Midwest propane prices are higher than those on the Gulf Coast for the first time in three years as domestic demand competes with exports for supply.

The benchmark price in Kansas averaged 1.4 cents a gallon more than the Texas equivalent this month, the first premium since November 2010. Midwest stockpiles are the lowest for this time of year since 1996, curbing supply in a region that uses more of the fuel to heat homes than anywhere else in the U.S.

The country is shipping record levels of propane and propylene abroad, helping improve margins for producers while raising costs for farmers to dry their crops in an area that produces 32 percent of the world's corn. Prices jumped 51 percent in the past year, illustrating a side effect of exports as shale drilling boosted production of natural gas liquids such as propane, as well as natural gas, to all-time highs.

"The demand for exports is pulling barrels to the coast and away from traditional U.S. markets," said Anne Keller, manager of natural gas liquids research at Wood Mackenzie, an energy consulting company in Houston. "Our own residential market is bidding against markets somewhere else in world for these barrels."

Propane in Conway, Kansas, was 3 cents a gallon higher than in Mont Belvieu, Texas, on Nov. 7, the most since Feb. 16, 2010, according to data compiled by Bloomberg. Conway and Mont Belvieu are the two largest storage hubs for the fuel in the U.S. Propane at Conway sold at an average discount of 18.9 cents to Mont Belvieu in 2012. The price fell 2.5 cents to $1.1925 a gallon on Nov. 15 in Conway, or 0.75 cent more than in Texas.

Midwest prices have risen as new pipelines, including DCP Midstream Partners LP's 175,000-barrels-a-day Southern Hills system, have allowed producers to ship more natural gas liquids, including propane and butane, from the middle of the U.S. to the Gulf Coast, where export docks and most of the country's petrochemical plants are located.

NGLs, which are pumped from wells along with natural gas and separated at fractionation plants, are used as feedstock in petrochemical plants, diluent for heavy crude in pipelines and gasoline blending.

Oneok Inc. expects the expansion of its Sterling pipeline system that carries NGLs to the Gulf Coast from the Midcontinent to come online before the end of the year, Terry Spencer, the company's president, said in a Nov. 6 conference call.

Enterprise Products Partners LP and Targa Resources Partners LP were among companies that this year opened new docks on the Gulf Coast for NGL exports.

The U.S. exported 294,000 barrels a day of propane and propylene in August, up 90 percent from the same month in 2012, according to the Energy Information Administration, the statistical arm of the Energy Department. Exports were a record 308,000 barrels a day in May.

"In terms of exports, the EIA does not break out propylene from propane in its statistics," said Peter Fasullo, principal at EnVantage Inc., a Houston-based energy consultant. "Virtually all of the exports are propane."

Increased shipments abroad helped reduce supplies and raise prices. The profit margin for fractionating propane in Mont Belvieu rose to 87.2 cents a barrel Nov. 15, from 57.8 cents a year earlier, according to data compiled by Bloomberg.

Propane production has increased 51 percent since February 2011, as drillers targeted so-called wet-gas shale plays, which are rich in NGLs, with directional drilling and hydraulic fracturing. Output was a record 1.49 million barrels a day the week ended Nov. 1, according to EIA data. Supplies in the U.S. reached a record 75.9 million barrels Oct. 5, 2012, and were at 60.8 million on Nov. 8.

The supply drain has been exacerbated in states in the northern Midwest, where farmers use propane heaters to dry crops, by wet conditions and a record corn harvest. Supplies in the Midwest fell 802,000 barrels to 19.8 million in the week ended Nov. 8, down 12 percent from a year earlier and the lowest level for early November since 1996, according to EIA data.

Governors of Indiana, Iowa, Minnesota, Montana, Nebraska, South Dakota and Wisconsin declared states of emergency in late October and early November to allow propane tanker drivers to work longer hours to make extra deliveries.

"Crop drying is pulling that differential higher right now," Kelly Van Hull, manager of energy analytics at RBN Energy LLC in Denver, said by phone Nov. 11. "Once we get into the middle of December, all of that demand should be done and we should see a more typical differential."

Midwest states will produce 312 million metric tons of corn this year, nearly a third of the global crop of 963 million, according to data from the U.S. Agriculture Department.

About 10 percent of homes in the Midwest use propane for heating in 2012, according to data from the U.S. Census Bureau. The Southeast follows with 6.9 percent, and the Pacific Coast is the lowest at 2.8 percent.

Conway prices may strengthen further over the winter, as companies boost shipments of raw NGL feeds, also called y-grade, to the Gulf Coast from the Midwest, Dan Lippe, managing partner at Petral Consulting Co. in Houston, said by phone Nov. 8.

Y-grade NGLs are fed into fractionators to separate the different components, such as ethane, propane, butane and natural gasoline. Companies want to fractionate on the Gulf Coast where there is more petrochemical demand for ethane, which makes up the largest portion of the NGL barrel, Lippe said.

"We hardly need any ethane in Conway," Lippe said. "No matter how cold it is, that volume of propane contained within the raw mix moves to Mont Belvieu. The premiums have the potential to get stronger over the course of the winter."

In the long term, U.S. prices will stay low enough to encourage more exports, Van Hull said, with supply going beyond South America to China and elsewhere in Asia.

"By 2018, you're probably looking at about 500,000 barrels a day of propane being exported," Van Hull said.

Enterprise is expanding its NGL export capacity and has signed multiyear supply agreements with overseas buyers such as TonenGeneral Sekiyu KK, a Tokyo-based refining and petrochemical company.

Foreign demand means U.S. homes that heat with propane won't see a repeat of last winter, when prices in the Midwest fell by 21 percent from the prior year. The EIA is forecasting that Midwest families who heat homes with propane will spend an average of $136 more this winter.

"If demand is really strong in markets outside the U.S., we could end up with pull between our obligations to supply export markets and U.S. demand, and really that falls on the backs of U.S. residential and commercial buyers," Keller said.

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