Shaken by polar vortex, U.S. braces for propane supply glitches
By Edward McAllister
NEW YORK (Reuters) - The millions of Americans that use propane to heat their homes, dry crops or keep livestock warm expect another tough winter this year as a fragmented supply network of pipelines, trains and trucks struggles to keep pace with spiking demand.
Last winter's brutal cold forced supply rationing across large swathes of the country, pushed prices to record highs and dented farming productivity as distributors struggled to get fuel to customers.
As a result, skittish consumers are buying more fuel this year and buying it earlier; many have ordered more storage tanks to stockpile fuel. The nonprofit Propane Education Research Council is launching a $5.5 million television and online ad campaign in September urging customers to secure supply ahead of winter.
At stake is not just winter heating supplies and higher bills for 10 million U.S. households, but Midwest crop and poultry output that relies on the $50 billion propane industry to survive. Although propane accounts for less than 2 percent of all energy used in the United States, it is the main fuel source in rural areas without access to natural gas pipes.
Weather forecasters do not expect a repeat of the extreme weather dealt by the polar vortex last winter, and wholesalers say they can guarantee supply. Indeed, government data show fuel stockpiles in the Midwest, where shortages hit hardest last year, are nearly 10 percent higher than this time last year.
But another bumper crop-drying season is also expected this autumn following what is expected to be a record corn crop, which could eat into propane reserves before winter even starts, suppliers and their customers said.
"Last winter was a living hell for us," said John Zimmerman, a turkey, corn and soy farmer in Southern Minnesota who uses propane to dry crops and heat his turkey barns. Zimmerman, who was forced to ration propane supplies last winter, has since added 5,000 gallons of storage to his 20,000-gallon store, but he remains wary.
"There is still a problem with distribution," said Zimmerman, who reckons that Minnesota turkey farmers saw a $25 million increase in heating bills over the past year. "We are still on the edge and this could happen again."
Despite stockpiling efforts, propane users will find themselves at the mercy not just of a rickety supply system at home that relies on door-to-door deliveries, but of competition for infrastructure with the much bigger oil and natural gas markets amid a shale production boom.
Oil and gas are given priority over propane, a by-product of oil refining and natural gas processing, in pipelines, trucks and trains because demand for those fuels is consistent throughout the year.
A key propane supply route, Kinder Morgan's Cochin pipeline from Canada, stopped transporting propane in July and will now be used to ship more profitable condensate to Canada to dilute heavy tar sands crude.
Pipeline operators say that although propane transport has increased this year over last year, there is not enough demand year-round to justify new investment in propane pipelines.
Supplies are also under threat from the unpredictable whims of an international market that could pull more of the fuel from U.S. shores. Exports of propane to markets as far afield as Japan were more than 50 percent higher in the first five months of this year versus the same period in 2013, according to the Energy Information Administration.
Unlike crude oil, there are no government restrictions on propane exports and there is no government-run emergency reserve.
The fiercest winter in thirty years, which followed a large, wet crop harvest, left propane suppliers scrambling to meet demand in January and February this year.
Pipelines filled to capacity; trucks lined up for days to secure a single load from one of the two main U.S. supply terminals; trains carrying propane from Canada found themselves logjammed in the upper Midwest as cold weather slowed progress. Prices spiked to their highest level ever, topping $5 per gallon at the major Conway hub in Kansas.
In reaction, Pennsylvania-based propane distributor Amerigas has seen a "significant increase" in early fuel purchases this year, according to David Lugar, the company's vice president of supply and logistics, a sentiment echoed by other suppliers.
Some, including Midwest wholesaler CHS Inc, have added rail transport capacity to bring in propane from Canada and make up for the loss of the Cochin line. Drew Combs, a vice president at CHS said his company has invested $25 million installing new rail capacity in the region, including buying more rail cars. His company has sold about 100 storage tanks to customers this year alone, up from less than 20 last year.
In Portage, Wis., Jon Crawford from Crawford Oil and Propane has "completely changed" his strategy for propane supply. He said he had a "more diversified portfolio" for this winter, using multiple suppliers to make sure he is not left short.
Even lawmakers have got involved. The Senate Propane Supply Heating Act of 2014 has called for, among other measures, a Midwest propane reserve to be tapped in emergencies.
"This winter, there is serious concern," said Mike Sloan, an energy analyst at ICF International in Virginia. "If you have a heavy crop-drying season and a cold winter, you could have some significant issues," he said. (Additional reporting by Robert Gibbons)