US Propane — Fourth-Quarter 2010, First-Quarter 2011: Anomalies characterize recent US propane reporting, movements

June 6, 2011
After years of predictable seasonal variations in key elements of the supply-demand balance, the winter 2010-11 was another study in divergence from the norm.

Dan Lippe
Petral Worldwide Inc.
Houston

After years of predictable seasonal variations in key elements of the supply-demand balance, the winter 2010-11 was another study in divergence from the norm.

First, some yield accountants continued to misreport the composition of merchant sales of propylene and propane and distorted the reported volume of purity propane from Gulf Coast refineries. Second, instead of declining to accommodate the seasonal increase in retail propane demand, feedstock demand remained steady at summer volumes throughout the winter.

Finally, Gulf Coast propane exports were higher during the winter than during the spring and summer. These and other issues are the primary focus of this article.

Despite persistent efforts on the part of industry committees to work with the US Energy Information Administration (EIA) to resolve reporting errors in refinery merchant sales of propane, these errors persisted throughout 2010 and into first-quarter 2011. We estimate EIA statistics understated refinery propane sales by 37,000 b/d in fourth-quarter 2010 and 20,000-30,000 b/d for first-quarter 2011.

Until the past 2 years, feedstock demand for propane was an important and predictable balancing element for the overall propane supply-demand balance in North America. When colder weather pushed sales and consumption in the retail markets steadily higher, ethylene producers in the Gulf Coast reduced their consumption and effectively offset some or all of the impact of a colder-than-normal winter and kept the market in balance. Historically, the seasonal decline in ethylene feedstock demand occurred during fourth quarter. Frequently, feedstock demand for propane rebounded during first quarter.

Feedstock demand

During fourth-quarter 2010, feedstock demand for propane declined by 12,500 b/d (4.1%) vs. demand in third-quarter 2010 and averaged 294,000 b/d. For the second consecutive winter, the decline in demand in fourth quarter was well below the typical seasonal decline of 50,000-70,000 b/d (12-15%). Propane’s share of fresh feed averaged 19.1% during fourth-quarter 2010 vs. 19.0% during third-quarter 2010.

Typically, as demand in retail markets begins to decline in February and March, feedstock demand rebounds during the first quarter from its seasonal low of the fourth quarter. With a limited decline in demand during fourth-quarter 2010, we would also expect a limited seasonal rebound in demand.

As expected, demand in first-quarter 2011 averaged 290,000-300,000 b/d. Although feedstock demand volumes in first-quarter 2011 were almost unchanged, propane’s share of fresh feed slipped and averaged 18.0%.

Table 1 summarizes trends in ethylene feedstock demand for propane.

Despite ongoing debates among politicians and economists, ethylene producers experienced a good year with strong profit margins, and strong margins carried over into first-quarter 2011. Due to a fire at one plant and unexpected operating problems at a few others, however, ethylene industry operating rates slipped to 86% in fourth-quarter 2010 vs. 90% in third-quarter 2010. Ethylene producers resolved these problems and the industry’s operating rate again averaged 90% in first-quarter 2011. The operating rate in first-quarter 2011 was also equal to the post-recession high of third-quarter 2010.

We forecast ethylene producers to operate at 88-92% of capacity during second and third quarters 2011. On this basis, we forecast total demand for fresh feed to average 1.60-1.65 million b/d. We also forecast feedstock demand for propane to average 280,000-300,000 b/d during second and third-quarters 2011 and propane’s share of fresh feed to average 18.0-19.0%.

Propane’s use as a space-heating fuel in residential-commercial markets reaches its seasonal peak each year during fourth and first quarters. Residential-commercial propane demand begins to increase during September-October and usually peaks during December-January.

Fig. 1 provides historic trends in ethylene feedstock demand for propane.

Retail demand

Based on heating-degree data published by the US National Weather Service, fourth-quarter 2010 was 0.4% colder than the previous winter and was also 0.6% colder during first-quarter 2011 vs. the previous year.

Based on the ongoing decline in residential and commercial demand since 2003, we estimate that total retail propane sales averaged 776,000 b/d in fourth-quarter 2010, or 36,000 b/d lower than in fourth-quarter 2009 despite slightly colder temperatures. We estimate that total retail propane sales increased to 1.07-1.09 million b/d in first-quarter 2011 vs. 1.07 million b/d in first-quarter 2010.

Exports

Spot prices in international markets during fourth-quarter 2010 were 20-40¢/gal higher than in Mont Belvieu during fourth-quarter 2010 and first-quarter 2011. Since freight rates for waterborne exports from the Gulf Coast were 8-10¢/gal, international LPG traders had substantial economic incentives to load cargoes for export throughout the winter heating season.

Propane exports from the Gulf Coast averaged 118,000 b/d (10.8 million bbl) during fourth-quarter 2010 vs. 105,000 b/d (9.7 million bbl) during fourth-quarter 2009. Propane exports from the Gulf Coast remained heavy during first-quarter 2011 and averaged 110,000-120,000 b/d vs. 97,000 b/d during first-quarter 2010. The year-to-year increase in propane exports from the Gulf Coast totaled about 3.0 million bbl.

Propane supply

Based on data published by EIA, total domestic production from gas plants and net propane production from refineries averaged an estimated 851,000 b/d, or 26,000 b/d (2.4 million bbl) less than year-earlier production for fourth-quarter 2010. Total domestic production declined in first-quarter 2011 to an estimated 815,000 b/d, or equal to production in first-quarter 2010.

Analysis of regional details of EIA refinery propylene and propane production volumes indicates purity propane from refineries was 36,000 b/d higher than EIA statistics, as published. Based on adjustments for misreporting of the propylene-propane split for refineries on the Gulf Coast, total domestic production was most likely 887,000 b/d in fourth-quarter 2010, or 10,000 b/d more than in fourth-quarter 2009.

Similarly, analysis of EIA statistics for Gulf Coast refinery propane indicates EIA statistics understated propane production by 25,000 b/d for first-quarter 2010. Production for first-quarter 2011 was 840,000 b/d. We forecast domestic production to average 845,000-865,000 b/d during second and third quarters 2011.

Gas plants

EIA statistics indicate that gas plant propane production averaged 584,000 b/d for fourth-quarter 2010 and was 33,000 b/d more than year-earlier volumes. Gas plant propane recovery during fourth-quarter 2010 was higher than in any previous fourth quarter since 1984. Furthermore, gas plant propane production during fourth-quarter 2010 was 18,000 b/d higher than in third-quarter 2010.

Typically, seasonal condensation in gas gathering pipelines reduces propane recovery during the fourth quarter. Gas plant propane production in Texas has been growing since 2007. The year-to-year increase in production from gas plants in Texas accounted for about 55% of the overall increase in gas plant supply for fourth-quarter 2010.

Supply from East Coast gas plants also posted a year-to-year increase of 4,000 b/d for fourth quarter. Although the increase by volume was small, it was a 34% increase vs. production in fourth-quarter 2009. Increased East Coast production indicates gas producers in the Marcellus shale have begun to deliver NGL-rich gas to local gas plants in Pennsylvania and West Virginia.

Based on EIA statistics for January and February 2011, we estimate production from gas plants averaged 555,000-565,000 b/d during first-quarter 2011, or 5,000-15,000 b/d more than in first-quarter 2010. We expect gas plant production to average 570,000-585,000 b/d in second and third quarters 2011.

Beginning in January 2010, a few refining companies with plants on the Texas Gulf Coast, in South Louisiana, and the upper Midwest changed how they reported to EIA components for mixed composition propane-propylene streams. These changes affected the reported volume of propane supply from refineries and the net availability to the merchant market. Based on preliminary discussions with EIA personnel, these refineries now report their propane-propylene streams to EIA as 100% propylene. Previously, these companies reported mixed composition streams to EIA as 100% propane. This topic was the subject of extensive discussion during 2010 by the NGL Market Information Committee of the Gas Processors Association and between the committee and the EIA. Furthermore, this issue highlights the inherent uncertainty of the reported statistics of refinery propane supply and the need for extensive education of refinery yield accountants. To date, EIA has made no progress at resolving this problem. We began to adjust EIA statistics as published to correct the reporting errors for merchant sales of propane from Gulf Coast refineries.

Fig. 2 shows trends in propane production from gas plants.

Refineries

For fourth-quarter 2010, EIA statistics showed propane production from refineries (net of propylene for propylene chemicals markets) averaged 267,000 b/d and was 60,000 b/d lower than net refinery supply in fourth-quarter 2009. At the same time, EIA statistics showed refinery propylene production averaged 279,000 b/d, or 61,000 b/d higher than in fourth-quarter 2009.

For first-quarter 2011 (based on statistics for January and February and estimates for March), refinery propane production was 245,000-255,000 b/d, or 15,000-25,000 b/d lower than in fourth-quarter 2010. In contrast, EIA statistics showed refinery propylene production was 275,000-285,000 b/d for first-quarter 2011, or unchanged vs. fourth-quarter 2010.

EIA acknowledges yield accountants for some refineries now report all merchant sales of propane and propane-propylene streams as 100% propylene. EIA has yet to instruct yield accountants at some refineries in the Gulf Coast, however, to report the merchant sales volumes of propane and propylene accurately. We estimate EIA statistics understated refinery propane production by 36,000 b/d for fourth-quarter 2010 and 25,000 b/d for first-quarter 2011.

Consistent with the seasonal increase in retail propane sales, propane imports from Canada typically increase to peak seasonal volumes of 150,000-175,000 b/d during fourth quarter and 170,000-190,000 b/d during first quarter. Additionally, propane imports from sources outside North America usually decline sharply during fourth quarter. Imports from international sources typically remain at seasonally minimum levels during first quarter.

We expect purity propane supply from refineries to average 320,000-330,000 b/d for second and third quarters 2011. Fig. 3 shows trends in total propane production (gas plants and refineries).

Imports

Based on data published by the US Census Bureau’s Foreign Trade Division, total propane imports averaged 158,500 b/d during fourth-quarter 2010, and propane imports from Canada averaged 123,200 b/d. Total imports for fourth-quarter 2010 averaged 1,500 b/d fewer than in fourth-quarter 2009. Imports from Canada were 4,200 b/d higher than in fourth-quarter 2009. East Coast import terminals received 35,300 b/d of waterborne imports during fourth-quarter 2010, or 6,000 b/d fewer than in fourth-quarter 2009.

In first-quarter 2010, total imports were 175,000-180,000 b/d, about equal to first-quarter 2009 but 20,000 b/d more than for fourth-quarter 2010. Imports from Canada increased to 137,500 b/d in first-quarter 2011, or 14,000 b/d more than in fourth-quarter 2010 and 11,000 b/d more than in first-quarter 2010. East Coast import terminals received about 41,000 b/d of waterborne shipments during first-quarter 2011, or 13,000 b/d fewer than in first-quarter 2010 but 6,000 b/d more than in fourth-quarter 2010.

Inventory trends

Propane inventory (excluding propylene inventory included in EIA gross propane-propylene inventory data) in primary storage in the US reached a peak of 59.8 million bbl on Oct. 1 and fell to 24.0 million bbl. EIA statistics from the Petroleum Supply Monthly (PSM) showed inventory withdrawals were 12.5 million bbl during November and December 2010 and 23.3 million bbl during January and February 2011.

Cumulative withdrawals totaled 35.8 million bbl during peak months of the winter heating season. Inventory withdrawals during March averaged 4.2 million bbl during 2005-08, but EIA statistics showed almost no change in inventory for March 2009 and March 2010.

Throughout the winter heating season, EIA weekly propane inventory statistics consistently overstated inventory volumes by 2-3 million bbl. EIA weekly statistics for end of February/early March showed inventory of about 25 million bbl. EIA statistics from the PSM showed 24 million bbl of purity propane in primary storage. Although the apparent overstatement had narrowed to about 1 million bbl, the discrepancy between weekly and PSM statistics was entirely in Gulf Coast inventory data.

EIA weekly statistics for March 2011 showed total US propane inventory increased 0.5-0.6 million bbl. We have to consider, however, that the EIA experienced persistent overstatement problems in weekly statistics throughout the winter heating season. Furthermore, we have to account for strong ethylene feedstock demand and ongoing waterborne exports at record highs in March.

After accounting for these factors, we expect EIA PSM statistics will show propane inventory declined by 2-4 million bbl, and we estimate total inventory fell to a seasonal low of 21.4 million bbl on Apr. 1, 2011. EIA’s monthly data, however, may show inventory was indeed unchanged during March and remained at 24 million bbl.

Propane inventory in Canada typically begins to decline in early September. In 2010, however, inventory in Canadian storage continued to increase during September and reached its seasonal peak of 12.3 million bbl on Oct. 1, 2010. Inventory in Canadian storage declined by 4.2 million bbl during fourth-quarter 2010 and an additional 4.8 million bbl during first-quarter 2011. Inventory in Canadian storage fell to a seasonal low of 3.3 million bbl on Apr. 1.

For North America, inventories reached a seasonal peak of 72 million bbl at the end of October 2010, or 12.6 million bbl less than the inventory peak in 2009. By December 2010, inventories on a North America basis fell to 55.4 million bbl, but total inventory was 1.8 million bbl more than end of December 2009. By Apr. 1, 2011, we estimate total inventory in North America fell to 24.5 million bbl and total seasonal withdrawals were 47.5 million bbl. During a typical winter, propane markets require 40-44 million bbl of inventory to be withdrawn from primary storage in the US and 8-10 million bbl from primary storage in Canada.

National Energy Board (NEB) also reports the breakout of purity propane inventory vs. propane contained in unfractionated mix in underground storage. NEB statistics showed purity propane inventory in Canada reached a peak of 9.9 million bbl on Oct. 1, 2010, or 0.4 million bbl less than year-earlier volumes and equal to the 5-year average. Based on monthly reports from NEB, Canadian companies withdrew 8.1 million bbl of propane from primary storage during the winter heating season.

Inventories of purity propane fell to a seasonal low of 1.8 million bbl at the end of March 2011. Purity propane inventories in Canada were 0.6 million bbl lower than the 5-year average and 1.0 million bbl lower than year-earlier levels at the end of March.

Fig. 4 shows trends in propane inventory in US storage.

Regional inventory trends

Although net additions to storage were small, propane inventory in primary storage in US Petroleum Administration for Defense District (PADD) 2 (see accompanying box for PADD regions) continued to increase during October and November. EIA monthly statistics show inventory peaked at 26.7 million bbl on Dec. 1, 2010. Inventory in primary storage was 2.7 million bbl higher than on Dec. 1, 2009, and 3.6 million bbl greater than the average for 2005-09.

By the end of February 2011, inventory in primary storage in PADD 2 declined to 9.5 million bbl and was 0.8 million bbl less than year-earlier volumes and 1.5 million bbl less than the 5-year average. During March 2011, EIA’s weekly reports indicated that inventories in PADD 2 increased by 1 million bbl and were unchanged during March. We estimate propane inventory in PADD 2 storage ended the winter heating season at about 9.2 million bbl, or about 1 million bbl less than the 5-year average.

Propane inventory in primary storage in PADD 3 (excluding nonfuel propylene) reached its peak at the end of October 2010 and totaled 25.9 million bbl. Inventory was 8.1 million bbl less than the peak inventory level of 2009. EIA statistics from the PSM showed inventory in PADD 3 storage declined by 4.8 million bbl during November and December 2010 and totaled 21.1 million bbl on Dec. 21, 2010. At this level, inventory was 1.1 million bbl less than a year earlier.

By the end of February 2011, inventory in primary storage in PADD 3 fell to 11.3 million bbl and was 0.2 million bbl more than in 2010. EIA weekly statistics show inventory in PADD 3 declined 0.3-0.4 million bbl. After correction for the overstatement problem between EIA’s weekly and monthly inventory statistics, inventory in PADD 2 storage shows a decline to 9.7 million bbl at the end of March 2011. At this level, inventory was 2.4 million bbl less than at the end of March 2010. Furthermore, estimated purity propane inventory in PADD 3 storage at the end of March was the lowest volume since EIA began providing breakout statistics for nonfuel propylene inventory.

Pricing, economics

During fourth-quarter 2010, WTI prices averaged $85.06/bbl and were $9.02/bbl higher than the average for third-quarter 2010. WTI prices increased steadily during fourth-quarter 2010; the average price in December 2010 was $89.08/bbl, or $7.18/bbl higher than in October 2010.

During first-quarter 2011, WTI prices continued to increase, averaging $93.98/bbl, and were $8.92/bbl higher than the fourth-quarter 2010 average. WTI prices continued to increase in April and averaged $109.90/bbl. Even though WTI prices for March 2011 were $27.81/bbl higher than in September 2010, prices for other global benchmarks increased by even larger margins. For example, dated Brent averaged $114.59/bbl, or $36.72/bbl higher than in September 2010.

Turmoil in various countries in North Africa and the Middle East sparked the surge in prices during first-quarter 2011. Protests began in Tunisia in December and January and spread to other countries during first-quarter 2011. Egypt experienced widespread civil protests during February 2011 and civil war in Libya broke out in March 2011.

Egypt produces about 525,000 b/d but is a small net crude oil importer. Protests in Egypt had little direct impact on crude oil production or net imports. Libya, by contrast, produced 1.65 million b/d in fourth-quarter 2010. Civil war there disrupted both production and exports during March and April and directly impacted global supply-demand balances. Saudi Arabia increased production in response to turmoil in Libya. Other countries including Bahrain, Syria, and Yemen also experienced protests, but these countries are also small oil producers. The threat that civil turmoil will spread to Saudi Arabia is sufficient to support the bullish trend in crude oil prices during second and third quarters 2011.

In October 2010 (the beginning of the heating season), propane prices in Mont Belvieu averaged 123.3¢/gal and were 16.6¢/gal higher than in August 2010. In December 2010, propane prices had increased to 127.6¢/gal, or 5.0% higher than in October 2010. In comparison, WTI prices were 8.8% higher in December than in October. The price ratio of propane vs. WTI averaged 63.2% in October 2010 but declined to 61.2% in December 2010.

Propane prices vs. alternative feedstock values provide the feedstock market’s measure of relative price strength. For third-quarter 2010, propane prices averaged 107.0¢/gal and feedstock parity values vs. light naphtha averaged 119.5¢/gal; propane provided ethylene producers with an incentive of 12.4¢/gal. For fourth-quarter 2010, propane prices averaged 126.1¢/gal and feedstock parity values vs. light naphtha increase to 143.0¢/gal. Propane’s demand incentive increased to 17.0¢/gal. The increase in propane’s demand incentive indicated prices were almost 5¢/gal weaker relative to feedstock-parity values than in third-quarter 2010.

During first-quarter 2011, propane prices in Mont Belvieu reached a peak of 146.8¢/gal in February but declined to 139.8¢/gal in March. Propane’s price ratio vs. WTI increased to 68.8% in February and was 57.0% in March.

A fire at Enterprise Products Co.’s west storage facility in Mont Belvieu in early February disrupted normal distribution of NGL feedstocks for at least 8-10 weeks. Despite the fire and the ongoing disruption to normal distribution patterns, prices were weaker in March than in February.

From the perspective of ethylene producers, propane’s advantage vs. light naphtha narrowed to 9.0¢/gal in February but widened sharply in March and averaged 33.8¢/gal. For first-quarter 2011, spot prices were 140.4¢/gal and propane’s incentive vs. light naphtha averaged 19.1¢/gal.

Propane prices: spring, summer 2011

From October 2010 through April 2011, WTI prices increased by about $34/bbl, or 45%. From the perspective of crude oil buyers and larger traders, turmoil in Tunisia and Egypt significantly increased supply risks. Turmoil in Libya reduced crude oil production and exports and further increased supply risks. More important, protests and efforts to overthrow established governments are ongoing in most countries that border Saudi Arabia. That country has so far avoided direct confrontation with protesters and was able to increase production to offset the loss of supply from Libya.

As long as civil unrest persists, however, crude oil buyers and large traders will remain wary of further supply disruptions and the potential for large price spikes. Various sources speculate that Iran supports and encourages protests in those countries that directly border with Saudi Arabia. If true, global crude oil markets may well face years of supply uncertainty and disruption. In addition, unless the Gaddafi regime yields to international pressure to discuss power sharing with rebel factions and peace breaks out, turmoil will provide support for sustained strength in global crude oil prices during second and third quarters 2011.

Furthermore, during second and third quarters 2011, market forces will work to resolve aberrations in pricing differentials between WTI and other benchmarks, such as Brent and Dubai/Oman. During first-quarter 2011, WTI prices averaged $7.00/bbl less than Organization of Petroleum Exporting Countries’ basket prices. In comparison, in third-quarter 2010, OPEC basket prices were $2.27/bbl less than WTI prices.

Regardless of what explanation may be correct, traders and crude oil marketers will work feverishly to transport crude oil from storage in Cushing, Okla., to the Gulf Coast for resale at world-parity prices.

We forecast WTI prices will average $105-115/bbl during second and third quarters 2011. Based on the outlook for motor gasoline prices and octane values, we forecast natural gasoline will average 245-255¢/gal. Feedstock parity values for propane vs. natural gasoline will average 150-165¢/gal during second and third quarters 2011.

For the same period, we forecast spot propane prices in Mont Belvieu to average 140-150¢/gal. In this range, ethylene producers will have incentives of 20-30¢/gal to use more propane vs. natural gasoline. This incentive will support steady feedstock demand.

Additionally, international LPG traders will have incentives of 15-25¢/gal to continue to load cargoes for export from the Gulf Coast. Finally, the propane-WTI ratio will average 55-58% during second and third quarters 2011 vs. 63% for first-quarter 2011.

The author
Daniel L. Lippe ([email protected]) is president of Petral-Worldwide Inc., Houston. He founded Petral Consulting Co. in 1988 and cofounded Petral Worldwide in 1993. He has expertise in economic analysis of a broad spectrum of petroleum products including crude oil and refined products, natural gas, natural gas liquids, other ethylene feedstocks, and primary petrochemicals. Lippe began his professional career in 1974 with Diamond Shamrock Chemical Co., moved into professional consulting in 1979, and has served petroleum, midstream, and petrochemical industry clients since that time. He holds a BS (1974) in chemical engineering from Texas A&M University and an MBA (1981) from Houston Baptist University. He is an active member of the Gas Processors Association and serves on the NGL Market Information Committee.

More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com