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US considers a strategic propane reserve

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WATKINS GLEN, N.Y. — America is awash in propane, a byproduct of booming oil and natural gas production. Yet getting it to markets at home and abroad is challenging and controversial.

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Long a niche in the energy sector, propane today is hot. Record exports and supply disruptions this past winter have refocused attention on propane, after prices went through the roof for consumers, businesses and farmers alike.

Congress and the Obama administration are studying a possible strategic propane reserve, to function like the ones for crude oil and home heating oil. Efforts to create additional private-sector propane storage often have been resisted at local and state levels.

“If they could do it with heating oil they could certainly do it with propane,” said Andrew Heaney, chief executive of Propane.pro, a national online marketplace that connects buyers and sellers of residential propane. “This is a vital fuel type, and there is a real danger of having another shortage. ... It just makes sense to put some kind of buffer into the system. It’s just common sense. It’s an insurance policy against disaster.”

About 50 million homes use propane for heating, water heaters, stoves and other appliances. Far from being a winter product used just in homes across the Midwest or New England states, propane has many farm and commercial uses. California, Florida, Illinois and North Carolina are among the largest users of propane.

Demand at home, abroad

America’s ongoing energy boom has meant a rapid rise in propane production. Propane is a hydrocarbon byproduct of the cleaning process in natural gas production and of petroleum refining.

Because of its ready availability and a growing global demand for it, drillers in such places as Texas, North Dakota, Ohio and Pennsylvania are increasingly producing liquefied petroleum gases, namely propane and butane.

The supply of LPG exceeds the American demand for it. Companies are racing to export the excess to Latin America, Europe and Asia. New export terminals are planned for such places as Beaumont, Texas, and Longview, Wash.

The Energy Information Administration projected last year that LPG exports would rise from about 100,000 barrels per day in 2011 to half a million barrels per day by 2017. U.S. exports hit a record 302,000 barrels per day last year.

In contrast, U.S. demand for propane last November was more than

1.8 million barrels per day, powered by the need for propane to dry a record corn crop. Another record or near-record crop is projected for 2014.

Despite the boom, homeowners across the nation either couldn’t get propane last winter or paid dearly for it. Facing a national supply crisis in February, federal regulators intervened, ordering pipeline operators to give priority to propane shipments to markets where some residents were without heat.

The winter crisis prompted a May 1 Senate hearing, triggered Energy Department studies and sparked calls for such measures as banning exports and creating a strategic reserve like those for oil, begun in 1974, and home heating oil, begun in 2000.

“The macro situation is that there are still no restrictions on export of propane, no controls on export of propane. The government has no idea how much propane there is in the country until it’s too late,” Heaney said, arguing for a strategic reserve. “What we saw last winter was an absolute disaster. The public is no less exposed at this point than it was at the beginning of last winter.”

Storage options

A propane reserve could be created in existing storage hubs such as Conway, Kan., or Mont Belvieu, Texas. Or, the federal government could request proposals to pay private companies with existing storage to keep a certain percentage of propane as a buffer, purchasing it in the summer when prices are lower.

“The real culprit is storage,” said Joe Rose, president of the Propane Gas Association of New England, arguing that whether it’s through the government or the private sector, more propane must be set aside over the lower-use summer months to assure sufficient supplies during the winter.

Steve Ahrens agreed. Ahrens, executive director of the Missouri Propane Gas Association, said he’d like to see more storage as a buffer and closer oversight of supplies and pricing after last year’s harsh winter.

“We certainly felt it was a natural disaster, like a hurricane or tornado, and that people should not be profit-taking,” said Ahrens, whose state uses propane on farms and to heat 1 in 10 homes.

 “If you put a dollar amount on all the pain and suffering ... last year, you might be able to support some sort of government purchase of propane through the summer to build those inventories.”

Propane inventories in the Midwest were lower than last year’s averages for much of the spring, keeping prices high. Storage has now slightly passed last summer’s levels, suggesting some relief, but the buildup before winter will be key to next winter’s prices. Low storage levels probably will mean high prices, Ahrens said.

 “That’s how markets allocate a scarce resource,” he said.

Except that propane isn’t scarce. It’s being produced and exported in record amounts.

That might explain why the Obama administration has said little about the idea of a strategic reserve for propane. The U.S. Department of Energy declined to make anyone available to discuss the matter.

At the Senate hearing in May, the agency’s director of energy policy testified that the crude and home heating reserves were created when energy supplies were scarce, which is not the case with propane.

“Reserves are certainly something we will be looking at,” Melanie Kenderdine said in testimony.

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