Analysis: Propane freeze squeeze may harden resistance to U.S. oil exports

NEW YORK Sun Jan 26, 2014 12:29pm EST

NEW YORK (Reuters) - A shortage of propane heating fuel during a brutal U.S. cold snap this month threatens to sharpen the year's most urgent energy policy debate - how much of its newfound shale oil and gas bounty should America export?

Millions felt the pinch last week as another wave of biting, bitter cold strained already low propane supplies in the Midwest, causing prices to surge three-fold over two weeks to record highs and forcing suppliers to ration deliveries.

While the shortage was likely caused by a confluence of events, including extraordinary cold, a temporary pipeline shut-down, and low stocks, some industry observers and at least one politician blamed the spike in part on soaring exports of liquefied petroleum gases (LPGs) such as propane.

Unlike crude oil and natural gas, both of which are now at the center of a national debate over restrictive export rules, LPG and other fuels can be freely shipped abroad.

Ron Wyden, Senate Energy Committee Chairman and an Oregon Democrat who has opposed unlimited exports that could raise consumer prices, believes the propane squeeze is a "concrete example" of the risks that consumers may face, he said via a spokesman. It shows why "the United States needs to take a cautious approach to energy exports".

Iowa Senator Chuck Grassley called on the Federal Trade Commission to review the cause of the price spike to ensure markets weren't being manipulated.

By Friday evening, wholesale prices had begun to subside, offering hope that the shortage may be easing as traders ship cargoes of compressed LPG to the East Coast and truckers divert more supplies from the Gulf Coast refining hub.

Still, the scare may fuel more resistance to easing export constraints of any type of energy, and shows how the unexpected eruption of U.S. shale oil and gas is also creating temporary pockets of scarcity, as energy companies adjust their supply chains and transport networks to a new era of abundance.

UNLIMITED EXPORT

Propane production has grown across the country from shale wells that typically produce LPGs alongside oil and gas, rising 27 percent over the past five years to 1.4 million barrels per day (bpd), Energy Information Administration data shows.

As output rose, prices slumped to well below global rates, because producers lacked the specialized, pressurized facilities to ship propane abroad. By mid-2012, benchmark prices in Conway, Kansas, fell to 50 cents a gallon.

But with a profitable price gap, companies including Enterprise Product Partners (EPD.N) and Phillips 66 (PSX.N) invested millions in export facilities, and shipments have swelled. After rising to 170,000 bpd on average in 2012, exports reached 300,000 bpd last May and topped 400,000 bpd for the first time in October, EIA data show.

Politicians and energy analysts explain the shortage as the culmination of several unusual factors - a record-breaking freeze at the start of January came just as propane inventories were abnormally low due to a bumper corn harvest last fall, which used up propane for drying out the crop.

A pipeline outage during most of December exacerbated the situation.

Nonetheless, opponents of energy exports believe there is more to the coincidence of an export boom with a price spike.

"I know some want to characterize the situation as the perfect storm," said Brandon Scholz, managing director of the Wisconsin Propane Gas Association. "But we believe that less and less. ... The high level of exports came at a time when they contributed to a significant fall in propane inventories."

Propane is not the only market to experience sudden shortages this winter. Northeast and New York natural gas prices have surged 10-fold in recent weeks due to a lack of new pipelines to meet growing peak-winter demand.

ENERGY INDEPENDENCE

The situation with natural gas and oil is not the same as

LPG.

The United States imposed a ban on crude oil exports during the 1970s Arab Oil Embargo and it became the backbone of U.S. energy security policy. Decades later, as oil production soared thanks to the fracking-led shale revolution, some in the industry have said the time has come to lift the curbs.

Natural gas exports to non-Free Trade Agreement countries was essentially barred under separate laws, although the Obama Administration has begun approving a handful of the near two-dozen requests to ship liquefied natural gas (LNG) abroad.

Few expect a knee-jerk ban on LPG exports, as some would like. But the arguments presented by some propane associations, tinted as they are with energy security concerns, may be hard for lawmakers to contend with during an election year.

"The notion of energy independence that everyone bought into with the shale revolution apparently doesn't mean anything," said Steve Ahrens, executive director of the Missouri Propane Gas Association. "If the price moves (propane) somewhere else, it is not available to us," Ahrens said.

Ahrens and Scholz said they would be talking to their congressmen about the shortage, urging them to act.

Eventually, as in most open commodity markets, prices should subside as more fuel is rushed inland. Gulf Coast propane prices rose this week by barely 20 cents, and at $1.50 per gallon offer a lucrative arbitrage to the Midwest. Many states have eased rules on propane trucks to speed deliveries.

But even then, the political implications may linger.

"This is definitely an issue that will come to the surface as the fallout (of the shortage) becomes more well known," said John Kilduff, partner at Again Capital LLC, a hedge fund. "The industry has been caught short, a lot of consumers are going to ask the question - why are we allowing this?"

(The story corrects byline; corrects to say in paragraph 5 that Wyden is opposed to unlimited exports.)

(Reporting by Timothy Gardner in Washington and by Julia Edwards and Edward McAllister in New York; Writing by Sabina Zawadzki; Editing by Ken Wills)

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Comments (4)
SteveAhrens wrote:
Just to be clear, in my visit with Reuters on this subject I did not support a “knee jerk” ban on exports. I do think a voluntary limit on propane exports when inventories fall below some predetermined threshold–80% of the 5-year average, for example–would allow producers to find markets while protecting the millions of Americans who are facing a real crisis today.

I do stand behind the characterization that the much-trumpeted “energy independence” slogan has no real meaning given the abundance of US propane produced today and the utter lack of propane available to many Americans. The supply for basic heat is being rationed, with prices rising to unimaginable levels, while exports continue with no such restriction. This is the very opposite of “energy independence.”

Supply and demand? I invite you to explain those economics to a family forced out of its home by freezing temperatures, the poultry grower who must euthanize his hatch or the propane retailer whose four-generation business faces calamity. Unlimited exports of this domestic energy source have failed to protect Americans from a relentless, expensive winter through no fault of their own. Those who support crude exports may claim that this has no relation to LPG, but what if it does? A little bubble like this with gas prices and the President will have to deploy the National Guard.

A voluntary but enforceable limit on propane exports should be an absolute commitment in any discussion to repeal the Jones Act. Without this assurance, any Member representing a Midwest or Northeast state is doing his or her constituents a disservice.

Jan 27, 2014 10:19am EST  --  Report as abuse
SteveAhrens wrote:
Just to be clear, in my visit with Reuters on this subject I did not support a “knee jerk” ban on exports. I do think a voluntary limit on propane exports when inventories fall below some predetermined threshold–80% of the 5-year average, for example–would allow producers to find markets while protecting the millions of Americans who are facing a real crisis today.

I do stand behind the characterization that the much-trumpeted “energy independence” slogan has no real meaning given the abundance of US propane produced today and the utter lack of propane available to many Americans. The supply for basic heat is being rationed, with prices rising to unimaginable levels, while exports continue with no such restriction. This is the very opposite of “energy independence.”

Supply and demand? I invite you to explain those economics to a family forced out of its home by freezing temperatures, the poultry grower who must euthanize his hatch or the propane retailer whose four-generation business faces calamity. Unlimited exports of this domestic energy source have failed to protect Americans from a relentless, expensive winter through no fault of their own. Those who support crude exports may claim that this has no relation to LPG, but what if it does? A little bubble like this with gas prices and the President will have to deploy the National Guard.

A voluntary but enforceable limit on propane exports should be an absolute commitment in any discussion to repeal the Jones Act. Without this assurance, any Member representing a Midwest or Northeast state is doing his or her constituents a disservice.

Jan 27, 2014 10:19am EST  --  Report as abuse
birdonawire wrote:
All you republicans out there cheering for Keystone XL remember that what exports are doing to the propane market they will do to the oil market. Drive up prices for American’s at the pump.

Jan 27, 2014 2:25pm EST  --  Report as abuse
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