US Propane-Third Quarter 2005: Storms roil supply, markets

Nov. 7, 2005
The third quarter began normally and unremarkably in July, but in August and September nearly everything imaginable occurred that might limit propane production from US gas plants and refineries.

The third quarter began normally and unremarkably in July, but in August and September nearly everything imaginable occurred that might limit propane production from US gas plants and refineries.

The months will be remembered for the damage caused by back-to-back major hurricanes, Katrina and Rita. After Hurricane Ivan in late September 2004, damage to Gulf of Mexico subsea pipelines, production platforms, and onshore processing facilities required 6 weeks to restore 80% of shut-in production and 10 weeks to restore 90% of shut in production.

Katrina and Rita were stronger storms and caused more damage to gulf natural gas systems and onshore processing facilities. Furthermore, Katrina and Rita scattered the offshore workforce. As a result, restoring 80-90% of shut-in production in the Gulf of Mexico will probably require 2-3 months and could take 4-6 months.

Finally, Katrina and Rita also damaged refineries in Louisiana and Texas. Propane production from three major refineries (Belle Chasse, La., Chalmette, La., and Pascagoula, Miss.) was unavailable during August and September, and these refineries will probably remain out of service for most of fourth-quarter 2005.

Propane production from three major gas plants in southeast Louisiana will be unavailable for 3-6 months. US propane supply will be reduced by at least 5% during fourth quarter.

Feedstock demand

Demand for propane in the ethylene feedstock market is the key to the strength or weakness in overall demand during spring and summer.

In a continuation of trends that began in second-quarter 2005, feedstock demand for propane in July remained weak and propane accounted for only 17% of total fresh feed. Propane demand was weak in both LPG crackers and multifeed crackers.

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In August, ethane prices rose sharply in concert with natural gas, but propane prices remained relatively weak. This shift in ethylene production costs prompted some ethylene producers to increase propane’s share of total fresh feed. As a result, propane demand jumped to 360,000 b/d in August vs. 300,000 b/d in July (Table 1).

Propylene prices, however, jumped sharply within days of Hurricane Katrina’s landfall in late August, and the indefinite loss of refinery propylene production from three major refineries in southeast Louisiana and Mississippi sparked an 8¢/lb (31%) increase in chemical-grade propylene prices.

Hurricane Katrina flooded low-lying areas of southeast Louisiana in late August where three of the largest gas plants in the US were in Katrina's direct path. Venice (shown here) is one of them and experienced extensive flood damage and repairs may take 3 to 6 months to complete.
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When propylene prices increase sharply, ethylene-production costs based on propane typically decline, and the improvement in economics prompts ethylene producers to use more propane. Propane’s share of fresh feed remained strong in September, but storm-related outages reduced total consumption to 310,000-320,000 b/d.

Hurricane Rita forced shutdowns of ethylene plants throughout the Texas and Louisiana coastal areas. Six ethylene plants in Beaumont and Port Arthur, Tex., and two plants in Lake Charles, La., were without electric power for at least 1-2 weeks in October. Utilities in the area were able to restore power in Beaumont-Port Arthur and Lake Charles faster than in New Orleans after Katrina.

Two ethylene plants suffered damage from fires: BP PLC’s Innovene plant at its Texas City refinery in August and Formosa Plastics Corp.’s plant in Point Comfort, Tex., in October. Damage to these plants will reduce operable ethylene capacity by about 6%.

Ethylene plants will run at 95% of operable capacity during fourth-quarter 2005 and first-quarter 2006 to make up for production losses during September and October. Furthermore, propylene prices are likely to remain very strong during fourth quarter and contribute to favorable economics for feedstock demand for propane.

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Feedstock demand for propane is likely to average 300,000-350,000 b/d during the winter heating season. Fig. 1 illustrates historic trends in ethylene feedstock demand.

Demand, supply

Propane’s use as a space-heating fuel in the residential and commercial markets is the dominant retail end use.

During second and third quarters, residential and commercial propane demand is at its seasonal minimum. We estimate demand for all retail end uses averaged 140,000-150,000 b/d in third-quarter 2005.

Propane demand begins to increase in September and will reach its seasonal peak during December-February. In a typical year, propane demand for all retail end uses averages 1.2-1.4 million b/d December through February.

This year, high prices for all energy products may cause residential-commercial consumers to be more conservative in their use of propane for space heating. Based on a conservation effect, total retail demand will likely average 1.1-1.2 million b/d.

July will be the last month in 2005 that US propane production will have been at full recovery.

Total production from gas plants and refineries averaged 866,000 b/d. During late August, Hurricane Katrina caused extensive damage to three major gas plants and four major refineries in southeast Louisiana, Mississippi, and Alabama. In late September, Hurricane Rita damaged 11 major gas plants and 2 refineries in southwest Louisiana and 4 refineries in the Beaumont-Port Arthur area.

Damage to some of these facilities will limit propane supply for at least 2-3 months and possibly for as long as 6 months.

Gas plants, refineries

In third quarter, propane production from gas plants averaged 505,000 b/d in July but declined to an estimated 480,000-490,000 b/d in September. With all plants in operation and operating at full recovery, gas-plant production would normally average 520,000-530,000 b/d. Instead, production from gas plants averaged about 500,000 b/d in third quarter.

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We expect gas-plant production to average 500,000 b/d in fourth quarter, but recovery should increase to 520,000-530,000 b/d in first-quarter 2006. Fig. 2 illustrates trends in propane production from gas plants.

In third quarter, propane production from refineries (net of propylene for propylene chemicals markets) averaged 320,000 b/d, a decline of 20,000 b/d from refinery supply in second quarter. In July, production averaged 325,000 b/d, but estimated production declined to 300,000 b/d in September.

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With all refineries in operation, propane production would normally average 340,000- 350,000 b/d. Propane supply from refineries will average 500,000 b/d in fourth quarter, but recovery should increase to 320,000-340,000 b/d in first quarter. Fig. 3 illustrates trends in total propane production (gas plants and refineries).

Consistent with the seasonal decline in US residential-commercial demand, propane imports from Canada typically decline during second and third quarters. Propane imports from sources outside North America, however, tend to increase sharply during these quarters.

This year was no exception. Imports from Canada averaged 110,000-115,000 b/d in third quarter but will increase to 200,000-210,000 b/d during the winter heating season.

International imports averaged about 110,000 b/d during third quarter. As space-heating demand in Europe and Asia increases, propane availability in international markets will tighten. At most, waterborne propane imports will average 50,000-60,000 b/d and may be as low as 30,000 b/d during the winter heating season.

Inventory trends

US propane inventory in primary storage totaled 27 million bbl at the end of March 2005. By mid-September, accumulation in primary totaled about 40 million bbl. Propane in primary inventory in Canada totaled 3.4 million bbl at the end of March and increased by about 8 million bbl.

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At the beginning of the winter heating season, propane markets in North America will have 81 million bbl in primary storage vs. 80 million bbl in 2004 and 77 million bbl in 2003 (Table 2). In a typical winter heating season, the market withdraws 40-44 million bbl.

With 68 million bbl in US storage at the beginning of the winter season, propane markets have 47-48 million bbl of usable inventory. This winter, however, markets face a loss of 100,000 b/d of production related to hurricane damage and recovery losses due to unusually strong natural gas prices. As a result, inventories of 68 million bbl may not be enough to meet the market supply requirements during the winter heating season.

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Fig. 4 illustrates trends in propane inventory.

Propane inventory in primary storage in US Petroleum for Defense District (PADD) II totaled 8.5 million bbl at the end of March. Inventory in PADD II was about 1.5 million bbl below the 3-year average. (PADD II encompasses Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Wisconsin.)

By the end of September, inventory in primary storage in PADD II totaled about 25 million bbl and was 1.5 million bbl higher than the 3-year average. Withdrawals of supply from primary storage will total 16-18 million bbl during the winter heating season and inventory in PADD II will decline to a seasonal low of 7.5-9.0 million bbl.

Propane inventory in primary storage in PADD III totaled 15.9 million bbl at the end of March 2005. (PADD III encompasses Alabama, Arkansas, Louisiana, Mississippi, New Mexico, and Texas.)

Inventory in PADD III was about 0.5 million bbl above the 3-year average. By the end of September, inventory in primary storage in PADD III totaled about 37 million bbl and was 2.4 million bbl higher than the 3-year average.

Withdrawals of supply from primary storage will total 22-26 million bbl during the winter heating season, and inventory in PADD III will decline to a seasonal low of 11-15 million bbl.

At the end of March, propane inventories in Canada fell to a seasonal low of 3.4 million bbl (including propane in unfractionated streams). Inventories were 1.3 million bbl below the 3-year average.

During the spring and summer, inventory accumulation rates were about average during second quarter but were only half the 3-year average in July.

As a result, inventories at the beginning of the winter heating season will be about 2.5 million bbl below average. Withdrawals during the winter heating season will total 8-9 million bbl and inventories will fall to a seasonal low of 2 3 million bbl at the end of March.

Pricing, recovery costs

In most market situations, trends in crude oil prices and ethylene-feedstock parity values are the dominant influences on propane prices. This year was no exception.

Propane prices in Mont Belvieu jumped to 113¢/gal in September, or 34% higher than in the July average of 84¢/gal. Despite the surge in prices, propane’s ratio vs. West Texas Intermediate was relatively weak and averaged only 64.6% vs. 76% in third-quarter 2004.

Occasionally, gas-plant recovery costs also influence trends in propane prices. This year, propane-recovery costs for gas plants in Louisiana averaged 90¢/gal in third quarter and increased to 112¢/gal in September vs. 72¢/gal in July. Propane-recovery costs in other major production basins (e.g., West Texas and New Mexico, Oklahoma and Kansas, and the Rocky Mountains) were in the range of 75-80¢/gal during third quarter but were also very strong in September and averaged 94¢/gal.

The increase in spot prices in Mont Belvieu helped to keep propane recovery profitable for all gas plants except those in Louisiana. There, the sharp decline in gulf natural gas production made the loss of profitability moot.

During September, pricing differentials for natural gas in various production basins were much wider than is typical under normal market conditions. Weaker natural gas prices in areas other than Louisiana will result in substantially lower gas-plant recovery costs, and propane recovery should remain profitable throughout the winter heating season.

The outlook for natural gas prices, however, is especially uncertain; they may reach much higher levels during the winter heating season. The profitability of propane recovery for gas processors during the winter heating season depends on a speedy recovery for natural gas production in the gulf.

Winter propane prices

If WTI prices average $58-62/bbl, as forecast, spot propane prices in Mont Belvieu may fall as low as 94¢/gal in December. Natural gas prices are likely to remain strong, however, until mid to late January and may not begin to decline until late February or early March.

Based on propane-recovery costs for gas plants in Louisiana and the Texas Gulf Coast, propane prices are likely to remain higher than 100¢/gal during the winter heating season.

Series change

With this installment of Oil & Gas Journal’s quarterly US Propane series comes a change in authorship and a widening of focus.

Dan Lippe, principal of Petral Consulting Inc., Houston (www.petral.com), takes over as author of this quarterly series.

Beginning with the present article and in future November and May installments, he will discuss movements and trends in the US propane industry at key points in this commodity’s annual cycle. In the February and August installments, Lippe will shift attention to the US petrochemical markets.

The author

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Daniel L. Lippe is president of Petral Consulting Co., Houston, which he founded in 1988; in 1993, he cofounded Petral Worldwide. He began his professional career in 1974 with Diamond Shamrock Chemical Co. and moved into professional consulting in 1979. He received a BS (1974) in chemical engineering from Texas A&M University and an MBA (1981) from Houston Baptist University. Lippe is an active member of the Gas Processors Association, serves on the NGL market information committee, and has served two terms as chairman of the committee.