Analysis of US propane inventory components-primary, secondary, and tertiary-in advance of the 2000-2001 heating season has indicated that, during periods of severe cold weather, supplies may be unable to meet demand.
On the macro level, US propane markets have sufficient flexibility to meet heating-season demand. But primary supplies of propane are concentrated in a few major supply hubs, such as Mont Belvieu, Tex., Conway, Kan., and Sarnia, Ont.
Heating-market demand is distributed over a wide geographic area. Propane markets rely on a few pipelines that deliver product from primary supply centers to end-users. These pipelines have finite pumping capacities.
Past experience of periods of severe cold weather in North America has shown that pipelines and major terminals will go on allocation. During these periods, propane supplies in secondary and tertiary storage become more important than all the propane in Mont Belvieu, Conway, and Sarnia combined.
And it is reduced volumes in these components over the last 3 years, as determined by Petral Consulting Co., Houston, in an analysis of US propane storage trends, that causes concern over the adequacy of US propane supply during the current heating season.
Inventory components
Propane markets rely on four components of supply:
- Daily production from gas plants and refineries.
- Imports.
- Primary propane inventories.
- Secondary and tertiary propane inventories.
The US Energy Information Administration (EIA) of the Department of Energy routinely collects and publishes statistics on daily production, imports, and primary inventories.
EIA statistics for gas plant and refinery propane production, imports, and primary inventories indicate that propane availability is at record high levels this year. Based on these published statistics, producers and consumers may reasonably conclude that propane supplies for the winter heating season are in good shape.
Published statistics, however, provide an incomplete picture of propane supplies for the winter heating season. They do not indicate the volumes of propane in secondary and tertiary storage.
Secondary storage for propane consists of all aboveground pressurized and refrigerated storage tanks that are operated by propane retailers at their various sales offices. Tertiary storage includes all storage tanks at customers' homes and businesses. Every residential, commercial, and industrial propane consumer has an onsite propane storage tank.
At present, no government agency or industry trade association conducts surveys of propane inventories in secondary and tertiary storage.
Because of the inherent physical capacity limits of the US propane-distribution system, inventories in secondary and tertiary storage in the retail markets are the most important component of supply during the winter heating season.
This article provides an overview of trends in propane production, imports, and primary propane inventories and an assessment of trends in propane inventories in secondary and tertiary storage.
Methods
Since 1988, Petral has prepared detailed monthly analyses of regional propane supply-and-demand trends and has concluded that propane inventories in secondary and tertiary storage have fallen to critically low levels during the past 3 years. The company reached this conclusion after rigorous analysis of the disposition of the sum of all propane-supply sources on a monthly basis.
Every month since 1988, Petral has developed a material balance on regional propane markets in the US. Propane production and inventory statistics from the EIA provide a reasonably accurate picture of regional, domestic propane supplies. Statistics from the Foreign Trade Division of the US Bureau of Census provide a reasonably accurate measure of propane imports into regional US markets.
As do other consulting firms, Petral conducts monthly surveys of ethylene producers to determine how much propane is consumed as feedstock. Finally, based on the American Petroleum Institute's annual survey of propane retailers, the company develops monthly estimates of propane consumption in retail end-use markets.
During summer and autumn, the material-balance analysis consistently indicates that more product disappears from the primary supply system than can be accounted for by actual consumption. This difference is the volume of product that retailers and consumers put into secondary and tertiary storage.
During the winter and spring, actual consumption substantially exceeds primary supply, and retailers and consumers liquidate inventories in secondary and tertiary storage to make up the difference.
Furthermore, Petral's analysis indicates that the problem of unusually low levels of propane in secondary and tertiary storage is concentrated in the Midcontinent.
Primary supply
Propane produced or recovered by domestic gas plants and refineries in 1999 supplied about 82% of total propane consumption in the US in 1999. Imports accounted for almost 14% of total propane consumption in the US.
A net decline in propane inventories in primary and secondary and tertiary storage accounted for the remaining 4%.
During 1995-1999, gas-plant propane production averaged 510,000-525,000 b/d. In late 1999, however, gas-plant propane production jumped to 550,000 b/d. During the first 6 months of 2000, gas-plant propane production averaged about 550,000 b/d.
The year-to-year increase in gas-plant propane production results from the steady increase in associated natural gas from new reservoirs in the US Gulf of Mexico.
For the full year, gas-plant propane production will be about 11 million bbl higher than in 1999. Net refinery-propane production (spec product supply excluding chemical propylene) will average about 375,000-380,000 b/d or about the same as in 1999.
The combined volume of gas-plant production and net refinery production indicates that total domestic production will average about 950,000 b/d this year.
Statistics published by the Bureau of Census' Foreign Trade Division and corroborated by other data sources including Canada's National Energy Board indicate total propane imports into the US have been in the 150,000-160,000 b/d range.
In 1999, propane imports jumped to an all time record high of 200,000 b/d. This year, propane imports will be again average about 150,000 b/d.
The year-to-year decline in propane imports vs. 1999, however, more than offsets the increase in gas-plant propane production. When viewed on an overall basis, propane production in 2000 will be about 7 million bbl lower than in 1999.
Inventories
Primary storage facilities for propane include underground salt-dome storage in Mont Belvieu, Tex., Conway and Bushton, Kan., and Adamana and Bumstead, Ariz. Primary propane storage also includes smaller underground salt-dome facilities and large aboveground storage tanks along major propane pipelines and at propane import terminals such as the Sea-3 terminal in Newington, NH.
EIA and API routinely publish reports on the volumes of propane inventories in primary storage facilities. EIA also reports these statistics to the general public on a weekly basis during the winter heating season.
Secondary storage facilities for propane include all aboveground pressurized and refrigerated storage tanks operated by propane retailers at their various sales offices.
Tertiary storage facilities for propane include all storage tanks at customer homes and businesses. Every residential, commercial, and industrial propane consumer has an onsite propane-storage tank.
Propane retailers and residential and commercial consumers have a combined storage capacity of 120-130 million bbl. In comparison, the industry has about 130 million bbl of primary storage capacity in underground salt-dome caverns around the country.
But no government agencies or industry associations conduct surveys of inventories in secondary and tertiary storage. Such inventories are, however, probably the most important component of supply in the entire distribution chain during the winter heating season because consumers can use them as needed without having to rely on product shipments from inventories in primary storage in Conway and Mont Belvieu.
Evaluating fully questions about propane availability for the winter heating season requires an analysis of propane inventories in both primary storage and secondary and tertiary storage.
Primary storage
EIA and API conduct weekly and monthly surveys to determine the volumes of propane inventories in primary storage. EIA and API indicate that primary inventories of US propane reached a seasonal peak of about 64 million bbl on Oct. 31, 2000. These inventories on Oct. 1 had been about 10% higher than the historic average of 57 million bbl (Fig. 1).
Propane markets in North America are tightly integrated via the industry's extensive pipeline network. As a result, the question of propane availability for the winter heating season should also include an assessment of Canadian propane inventories.
These inventories totaled almost 12 million bbl at the end of September (Fig. 2). Canadian inventories at the beginning of the heating season will also be 10% higher than the historical average.
Even though primary propane inventories account for a very small fraction of total propane supplies on an annual average basis, they are a very important component of supply during the winter heating season when gas plant and refinery propane production and imports meet only 60-65% of total demand.
Propane inventories in primary storage account for 20-25% the market's total supply requirements.
The configuration of the NGL distribution system concentrates primary propane inventories in Mont Belvieu and Conway. Primary propane inventories in these two locations account for 85% of total primary propane inventories in the US.
Furthermore, retail propane markets rely on a few major propane pipelines to use these propane inventories. During the winter heating season, use of primary propane inventories is effectively limited by the maximum pumping capacity of the propane pipeline distribution system.
The capacity limits of this system and the concentration of propane inventories in Mont Belvieu and Conway increase the importance of propane inventories in secondary and tertiary storage.
Monthly statistics for propane inventories in primary storage provide a clear picture of the very seasonal nature of retail propane market supply-and demand trends.
Beginning in March or April each year, propane inventories begin to accumulate in primary storage facilities. Additions to storage during the spring, summer, and early fall typically total 30-35 million bbl. Primary propane inventories in Canada track a similar seasonal pattern.
By Oct. 1, primary propane inventories in the US reach their seasonal peak. In October, primary propane inventories begin to decline to a seasonal minimum by the end of the following March. The seasonal draw on propane inventories in primary storage is limited by the absolute volume of product in storage and by the distribution system's capacity to pump product from underground storage wells.
Secondary, tertiary storage
Typically, a few propane retailers and retail propane consumers begin to fill their individual storage tanks as early as May or June, but most propane retailers and retail propane consumers wait until September or October to fill secondary and tertiary storage.
On an aggregate market basis, propane transfers from primary storage into secondary and tertiary storage typically reach peak seasonal rates during September through November.
Just as primary propane inventories become a very important supply component during the winter heating season, propane inventories in secondary and tertiary storage also become very important on a seasonal basis.
Retail propane consumers fill their individual storage tanks during the summer and fall. During the winter heating season, these consumers rely on primary propane production and propane in primary storage facilities and use propane inventories in secondary and tertiary storage to supplement primary supply sources.
For the past few years, however, consumers supplemented these primary supply sources by liquidating propane inventories in secondary and tertiary storage. Results of Petral's on-going material balance indicate that the liquidation of propane inventories in secondary and tertiary storage consistently exceeded the volumes that were transferred into secondary and tertiary storage during the previous summer and fall.
Propane distribution systems, however, that transport production and primary inventories from the major propane supply locations in the US have finite capacity limitations. During cold weather, propane pipelines and propane distribution terminals operate at maximum capacity.
Propane pipelines and distribution terminals sometimes go on allocation when nominations for withdrawals of supply from the system exceed the systems' delivery capacities.
Because of the inherent capacity limits of the distribution system, propane inventories in secondary and tertiary storage are probably the most important component of supply in the entire distribution chain during the winter heating season.
A full evaluation of questions about propane availability for the winter heating season requires an evaluation of all important aspects of propane supply and demand.
Winter propane demand
The importance of propane inventories in secondary and tertiary storage is heightened by the strongly seasonal nature of propane demand in retail heating markets.
During the winter heating season, heating-market demand increases rapidly to peak levels. On a total US basis, Petral estimates that heating-season demand in residential and commercial markets increases from a summer low of about 100,000 b/d to a peak of 900,000-950,000 b/d during December through February.
Furthermore, residential and commercial propane demand is concentrated in the upper Midwest and along the East Coast. When propane use in other end-use markets is included, total demand swings from a low of about 850,000 b/d to a seasonal peak of 1.9-2.0 million b/d.
Petral derives its estimates of the seasonal swing in residential and commercial demand by applying the seasonal pattern of heating-degree-day statistics to average annual propane sales to residential and commercial consumers. Annual propane sales to residential and commercial consumers are based on the annual survey conducted by API.
Retail propane demand always exceeds daily production and imports during the winter heating season. This supply-and- demand imbalance is partially offset by primary propane inventories in the US and Canada.
Without question, primary inventories are a very important component of supply during the winter heating season. Residential and commercial propane consumers, however, also rely on propane supplies in their individual storage tanks (tertiary storage).
Consumer inventories
Petral routinely prepares detailed regional supply-and-demand analyses and forecasts as part of its ongoing consulting services.
The company's propane market forecast methodology focuses on regional supply-and-demand balances, and its regional supply-and-demand methodology allows tracking of transfers of propane from primary supply sources into secondary and tertiary storage and consumer use of inventories in secondary and tertiary storage during the winter heating season.
The company's experience in evaluating propane supply-and-demand trends yields an important conclusion: Propane inventories in secondary and tertiary storage are a very important component of propane supply during the winter heating season.
Although there are no direct surveys of propane inventories in secondary and tertiary storage, Petral can develop reasonable estimates of the volumes of propane that have been transferred into secondary and tertiary storage during the summer and early fall.
The company can also develop reasonable estimates of the use of propane inventories in secondary and tertiary storage during the winter heating season. Essentially, it develops a material balance on the primary propane supply system, taking into account actual physical consumption of propane in each end-use market.
These detailed monthly supply-and-demand analyses indicate that retail propane consumers typically withdraw about 30-40 million bbl of propane from secondary and tertiary storage during the winter heating season to supplement purchases from primary supply sources (Fig. 3).
During the past four winters, US residential and commercial consumers have used about 120 million bbl of propane during the peak demand season. From this perspective, propane supplies in secondary and tertiary storage account for 15-25% of total residential and commercial propane consumption during the winter heating season.
Residential and commercial markets in the Midcontinent and East Coast, however, account for about 75% of the US total. Residential and commercial demand in the Midcontinent accounts for about 50% of the US total.
Propane supplies in secondary and tertiary storage are especially important in these regional markets because distribution-system capacity constraints become a limiting factor on how much primary supply can be shipped to residential and commercial consumers.
During 1990-1997, residential and commercial consumers consistently and fully replaced secondary and tertiary inventories that were consumed during the winter heating seasons in the following springs and summers.
During 1998 and 1999, however, Petral's analysis indicates that consumers did not fully replace inventories in secondary and tertiary storage that were consumed during the winter heating season. The reasons for this trend have yet to be identified but may lie in some complacency following three back-to-back mild winters, among other possible explanations.
As a result, propane inventories in secondary and tertiary storage have declined by a cumulative 30 million bbl (Fig. 4). Petral's analysis indicates that a disproportionate share of the overall liquidation of propane from secondary and tertiary storage occurred in the Midcontinent.
During cold weather, propane supplies in secondary and tertiary storage are more important than all other components of total supply.
Icy road conditions will slow propane shipments from major pipeline terminals to retail propane bulk storage tanks. These conditions will also slow propane shipments from retail propane bulk storage to residential and commercial consumer storage tanks.
During cold weather, surges in demand cause the primary propane pipelines and delivery terminals to go on allocation, and deliveries of propane to retailer bulk storage and to consumers will reach system-capacity limits.
Retail propane marketers and wholesale propane marketers in the Midcontinent and East Coast markets are well acquainted with the limits of the distribution system. Residential and commercial consumers, however, are unlikely to understand the system's limits, nor should they be expected to understand them.
Petral estimates that propane retailers and residential and commercial consumers have about 125 million bbl of storage capacity. From this perspective, the estimated decline in secondary and tertiary inventories of 30 million bbl is substantial.
Furthermore, US propane production and primary inventories are inadequate to rebuild inventories in secondary and tertiary storage before the winter heating season begins.
The author-
Dan Lippe is president of Petral Cos. He holds a BS in chemical engineering from Texas A&M University and an MBA from Houston Baptist University. Petral Cos. have provided professional consulting services to the hydrocarbons industries since 1988. Services include analyses on market and pricing trends for crude oil, natural gas, natural gas liquids, and primary petrochemicals.
