Headlines

March 15, 2011
Connecticut General Assembly to Look at Propane Tank Ownership

Propane marketers in Connecticut face government scrutiny over the longstanding industry practice of owning a customer's onsite tank.

Members of Connecticut's General Assembly are preparing a study reviewing the state's propane business. Among the topics the report will address is the "container law" that prevents anyone other than a propane tank's owner from refilling the tank.

Only about 4% of Connecticut residences that use propane own their own tank, according to state estimates. Most customers lease their tank from the retailer or otherwise have a dealer-owned tank included as part of their monthly service agreement with a retailer.

The issue for the state's consumer advocates is that customers are locked into service and refilling agreements with the firm that owns the tank, and cannot shop around for lower-price propane.

Fire safety laws in Connecticut and other states usually limit who can refill a tank. The unstated advantage for the marketer, of course, is a locked- in customer, who can only use that retailer's product.

Kirk Wright, consultant at marketing advisory firm Pro Image Communications, said it's more common in Northeastern states for the propane marketer to own the tank. In Midwest and western states, more people own their own tanks, but a substantial portion still rely on the retailer's tank.

"Northeastern marketers are more focused on controlling the customer relationship," Wright said. "They don't want a will-call customer."

Austin Clark, director of supply at Connecticut-based Spicer Gas, says safety is the main reason propane dealers want to retain control of their tank.
As with cars, some customers are wont to run down their propane tanks to nearly empty before refilling. That can introduce air into the tank, which could cause serious problems with a home propane system.

An automatic refilling agreement assures that the propane retailer will know how much remains in the tank each month without having to perform expensive and complicated pressure tests, Clark says. 

"If you had a consumer owning their tank, you wouldn't know how much they have refilled it with or if they run it down to empty," Clark said. "It's a safety thing."

The real issue at the heart of tank ownership is allowing customers to shop around for the lowest price on propane. Clark says that, indeed, customers that own their own tank will pay less on a per-gallon basis than those who are in a contract. But the higher price is justified for the upfront costs of the propane marketer installing the tank.

Moreover, having a tank from one supplier does not stop a customer from switching to another, albeit the customer may face fees similar to those levied on cell phone or cable customers who switch. With four days' notice, a propane company is expected to remove its tank from a customer's property once a supplier switch is made.

"Some folks do want to own their own tank," Clark said. "But when the consumer finds out how much [they] cost, they basically just decide the supplier-owned tank is the better option."

Homeowners are not strictly forbidden from owning their tanks, Wright says.
But buying a propane tank can be somewhat difficult, he adds. Homeowners would usually still have to go through a marketer to buy a tank since they are rarely stocked at home-improvement or hardware stores. And customers also benefit from lease or rental arrangements as well. In addition to not having to pay upfront costs of a tank, a customer does not usually have to worry about maintenance and service costs. The propane retailer typically installs, services and repairs tanks as part of the agreement.

As part of an effort to increase tank ownership, Connecticut's consumer advocates are pushing to require propane marketers to list the market value of their tanks with county property tax assessors.

By doing so, homeowners would be able to find a depreciated cost for the tank that's been sitting on their property. As such, the homeowner would be in a better position to negotiate a sale price for a used tank with the propane retailer.

Wright says most marketers do typically list tanks with local assessors to ensure that a tank is not sold along with the property and home. And some marketers do sell tanks that have been leased or rented for long periods, Wright says. But that's not a common practice among all retailers. Clark says selling a used tank carries many risks for both parties. Despite their long lives, propane tanks, especially underground ones, are prone to rusting and pitting which can undermine their structural integrity. The liability issues of selling a used tank are also something propane marketers generally do not want
to assume.

"(Propane tanks) are long-lived assets, but they are not indefinitely lived," Clark said. "For a consumer, it's a question of how do you know what you are buying?"

Executives from Spicer Gas and other Connecticut marketers have gone to Hartford to make sure legislators have a more balanced view of the industry. Although not regulated like other energy utilities, Clark says that the propane industry still has many state rules to follow and the competition prevents widespread consumer abuse.

"There's a lot of competition that keeps consumer prices in line," Clark said. "Customers can change suppliers if they want. It's not quite as easy to change as filling up a car's gas tank, but it's not as if they can't change."

Connecticut's review and investigation committee is expected to have a report and recommendations on the topic ready by May 1.

March 9, 2011
Cost of Belvieu Work-Arounds After Enterprise Fire are Rising

To keep natural gas liquids flowing to customers following the February fire at Enterprise Product Partners' West Storage facility in Mt. Belvieu, Texas, the NGL industry has
had to create work-arounds. Over the past few weeks, the cost of those work-arounds has become increasingly apparent with price differentials moving as much as a dime
a gallon.

According to Enterprise Product Partners, the shutdown of its West Storage facility in the wake of the fire only accounts for 16% of its total storage capacity for NGLs at Mt. Belvieu. The rest of the facility is fully functional.

What's significant is the fact that the destroyed piping that runs through the facility played an important distribution role and the market is monetizing the loss of that part of West Storage. For instance, prices for wet NGLs (barrels for immediate delivery) at other storage locations are running a hefty nickel premium or more. Such a premium is not surprising at this time of year, because the winter heating and gasoline blending seasons are winding down. Propane suppliers and refiners trim back their bulk purchases and adopt a hand- to-mouth supply strategy through late February and March. They don't want to carry extra inventory through the summer.

Unrelated to the seasonal swings is the fact that in Mt. Belvieu, location differentials have widened.

In the propane markets, product stored at Enterprise has at times traded three to four cents a gallon under Targa and seven cents or more under LDH.
Enterprise natural gasoline is running 3cts/gal under Targa and 10cts/gal under LDH. E/p mix at Enterprise is about 0.25cts/gal under Targa, as well.

Interestingly, Enterprise ethane seems to continue to command a narrow premium over other markets. The same holds true with normal butane, with Enterprise normal butane running about 0.5cts/gal over Targa normal butane.
But those premiums, especially in butane, could be tenuous, observed one source. The source added that it has been possible to move butane in and out of Enterprise but at limited volumes. The differential is seen largely to represent the pump fees.

The propane market has seen the most significant price disruptions following the fire. At the time of the fire, TET (LDH) propane was running about 1.125cts/gal over Enterprise. That spread widened as the month progressed. By the end of February, when Devon declared a force majeure on deliveries of propane to the LDH storage facility, LDH propane prices were running 71.5cts/gal over the Enterprise market.

One source told OPIS that in late February, another firm came into the LDH wet market for propane, purchasing 100,000 bbl in order to cover delivery obligations and an avoid issuing a force majeure notice itself.

As March opened up, TET (LDH) propane was running about 4cts/gal over Enterprise.

The talk in the market is that it could take a minimum of two months for Enterprise
to bring the West Storage facility back on line. One trader thought two months
was optimistic.

When asked for an accounting of when service might be restored, an Enterprise spokesman wrote: "We have not provided an estimate as to when the West Storage unit will return to service. Our efforts have been concentrated primarily on managing logistical issues and making piping modifications allowing us to redirect as many affected customers as possible around the West Storage facility."

"Our y-grade receipt levels are at 100 percent of the pre-event levels and that deliveries will ultimately be at 85 percent to more than 100 percent of what they were prior to the fire, depending on the product. As part of the repair process, we are also looking at possible enhancements to the Mont Belvieu system that will help ensure future disruptions do not happen in the future," the spokesman said.

And NGL users and suppliers are also reevaluating their options, notes one source. A number have contacted other storage and fractionation plant operators inquiring about setting up alternative supply agreements. There's minimal talk, so far about creating new pipeline connections, but that's a real possibility, the source adds.

March 3, 2011
Canada Propane Association Elects First Board of Directors

The newly formed Canada Propane Association elected its first board of directors late last month. The organization started operations Jan. 1, 2011.

The new trade group was born in the ashes of the Sunrise Propane explosion and is expected to unify the voices of propane dealers as they deal with increased government scrutiny and regulation.

For years, two trade groups represented Canadian propane dealers: the Canadian Propane Gas Association, based in Calgary, which spoke for dealers in all provinces except for Ontario and the Ontario Propane Association.

But, the membership of the groups decided in 2010 to disband their old organizations and start fresh.

The new board members are: Andy Bite, chief executive officer of SLEEGERS Engineered Products Inc.; Doug Elliott, president, Superior Propane; Drew Harris, manager LPG marketing and operations (Canada), Shell Canada Energy; Gary Highfield, general manager, Wilson's Fuel Co. Limited; Jon Huddle, president, Diversco Supply Inc.; Dave Karn, Vice President of Operations Dowler-Karn Ltd.; Guy Marchand, president and CEO, Budget Propane 1998 Inc.; David Palmer, vice president, marketing, NGL Supply Co. Ltd.; Bill Rawlusky, manager, NGL Supply, BP Canada Energy Company; Robert Sicard, president and CEO, UPI Energy LP; Steven Sparling, vice president of operations, Sparling's Propane Co. Ltd.; Greg Thibodeau, general manager, marketing, Kinetic Resources (LPG).

February 24, 2011
Devon Energy's Force Majeure Causing Supply Shortfall

Devon Energy's declaration of force majeure is causing an end-of-month price spike in natural gas liquids, according to market sources.

Devon Energy warned customers two weeks ago that it would have trouble meeting volume targets for February due to limited fractionation capacity and well head shut-ins. In the intervening period, traders report that Devon has still not been able to meet production targets for February, leading customers to scramble for product.

TET propane saw prices rise from $1.47 per gallon earlier in the day to $1.58 per gallon. Non-TET propane saw prices climb from $1.4025 per gallon to $1.4975 per gallon.

A representative from Devon was not immediately available to comment.

February 8, 2011
U.S. Propane Exports Expected to Amount to 3 Million BBL in February

Propane exports are called to total about 3 million bbl in February. Through the rest
of 2011 and 2012, exports should continue to run about 3 million a month, say
market participants.

The bulk of the product is seen to be headed south toward Latin America with the periodic cargo heading north and east to Northwest Europe.

The reason the export outlook is so optimistic is because prices for U.S. propane today and in the future are more favorable compared to other propane- supplying nations. U.S. propane shipments are displacing some of those that normally come from Algeria.

A reason Latin and South American propane buyers are coming to the U.S. is partly due to the fact that propane production from Venezuela is off.

Given the fact that the economics favor exports, market participants are not expecting any propane imports to come to the U.S. through the end of 2012. The exception is propane will continue to be imported to marine terminals in Virginia, New Hampshire and Rhode Island. It is too expensive to move propane to those terminals from the Gulf Coast via ocean-going ship.

Butane exports are expected to be marginal, some traders say. The reason is that propane is in such demand, butane exports are being crowded out. And butane imports are not expected to amount to much either.

In the meantime, it appears that there's little progress being made to expand export capacity along the Houston Ship Channel, say market observers. A number of firms have talked about opening export docks, but they mostly seem to be engaging in talk.

According to some estimates, building or expanding existing facilities to handle gas liquids could run about $200 to $400 million and take at least two years to build. And any firm taking on that risk would want a minimum five-year supply commitment from an NGL producer, and no one yet has stepped up to sign on the dotted line.