Propane and NGL Surplus from US Shale has Become Wasteful

by Duane Nichols on June 25, 2015

Flares of Excess Natural Gas Liquids

Cook-Out News — Grillers rejoice as U.S. shale boom sends propane price to 13-year low

From an Article in Bloomberg News, June 24, 2015

The fuel that will grill millions of hot dogs nationwide on the Fourth of July is giving energy producers heartburn. Propane inventories have soared to the highest seasonal level in more than 30 years, sending prices in Texas to a 13-year low and forcing sellers in Canada to pay people to take it away.

The bargain-basement price is a byproduct of the U.S. shale boom, as record production of natural gas has doubled the supply of propane, commonly used for heating, crop-drying and cooking. The glut of natural gas liquids has turned the U.S. into the world’s biggest supplier and helped revive the nation’s petrochemical industry.

“We’ve gone from North America being a net importer of propane to the U.S. being the single largest exporter of propane,” said Michael Sloan, a Fairfax, Virginia-based principal at consulting firm ICF International. “It’s a good time to fill up your propane tank.”

Propane in Mont Belvieu, Texas, the largest storage site in the world, traded at 35.25 cents a gallon on Tuesday, down 68 percent from September 16. It fell to 31.5 cents on June 5, the lowest level since 2002. When producers extract natural gas from shale rock, it often comes up in a single stream that contains other fuels, including propane.

Natural gas for July delivery rose 1.4 percent to $2.764 per million British thermal units in electronic trading on the New York Mercantile Exchange on Wednesday.

In Edmonton (Canada), where a pipeline that used to deliver propane to the U.S. Midwest was reversed last year, prices on the spot market have fallen below zero, so sellers have to compensate buyers to take the product. The price has averaged a negative 5.8 cents this month, according to data compiled by Bloomberg.

Field production of propane rose to a record 1.1 million barrels a day in March, almost double what it was five years ago. Inventories of propane and propylene, a related chemical, were 58.1 million barrels, the highest for March since 1982.

Stockpiles were 80.7 million barrels as of June 12. Over the past five years, supplies have risen an average of about 40 percent from mid-June to mid-September before declining as heating and agriculture use increases. If the pattern persists this year, supplies will hit a record 113 million.

Marketers are scrambling to build more storage and export terminals. Sunoco Logistics Partners LP is spending $3 billion to resuscitate an oil refinery at Marcus Hook, Pennsylvania, that closed four years ago into an export hub for propane and other gas liquids.

The complex has 800 workers on round-the-clock shifts to complete the project. The facility already has a storage cavern carved like a honeycomb 400 feet into the granite underground that can hold 1 million barrels of propane, which are fed into tankers that dock at its eastern edge to be exported.

A pipeline from the Marcellus shale formation across the state is full, and trains and trucks bring in additional fuel. Propane and butane exports, which have jumped almost fourfold since 2010, will rise to a combined 800,000 barrels a day by the end of 2016 from about 500,000 last year, according to Anne Keller, an analyst at Wood Mackenzie Ltd.

The falling prices have been a boon for chemical companies that use the gas as a feedstock, including Dow Chemical, LyondellBasell Industries and Westlake Chemical, Hassan Ahmed, a petrochemical analyst for Alembic Global Advisors, said in a note to clients June 15.

Natural gas producers are being hurt the most by falling prices, said Charles Blanchard, an energy analyst for Bloomberg New Energy Finance in New York. Midstream companies that move and process NGLs may also earn less if they have contracts tied to commodity costs.

Propane’s slump could be short-lived. Consumption typically picks up in the late fall during crop-drying season and then in the winter for home-heating. Propane swaps for December on the New York Mercantile Exchange were 50 cents a gallon on June 22, a 28 percent increase from July prices.

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