0 Shock and Aftershock: A Look at this Last Winter and the Outlook for Future Supply Disruptions Prepared for the North Carolina Propane Gas Association September 16, 2014 Presented by: Warren Wilczewski ICF International 9300 Lee Highway Fairfax Virginia 22031
This Winter, Propane Shortages (and Prices) Made the Evening News 1
All The Evening News 2
3 This Presentation is About the Numbers 1) A focused look at what happened this winter. 2) A look ahead at the impact of key market trends on propane markets 3) A few thoughts on demand 4) An assessment on the likelihood of a future supply crisis like the one this winter
4 What Happened this Winter? IN 2013, U.S. PROPANE PRODUCTION INCREASED BY 1.4 BILLION GALLONS SO WHY WERE WE SHORT OF SUPPLY THIS WINTER? 1) Crop Drying 2) Cold Weather 3) Marine Cargo Exports 4) Capacity Outages and Constraints 5) Canadian Demand and Inventory 6) Cochin Pipeline Outage
5 2013 Grain Drying Demand Record Corn Crop Wet spring delayed planting Cooler than normal weather in July and August delayed the harvest Above-average rainfall in October Until the rains came in October, the market expected below-normal propane demand Source: ICF
Grain Drying Demand in the Region Served by the Cochin Pipeline Could Have Been Higher * Corn Crop Maturity data was not reported for the 1 st and 2 nd weeks of October Source: USDA 6
Cold Weather (East North Central) East North Central 18 percent colder than 30- year normal weather 18 percent colder than last winter 48 percent colder than the winter of 2011/2012 October to March Heating Degree Days West North Central 12 percent colder than 30- year normal weather 14 percent colder than last winter 40 percent colder than the winter of 2011/2012 Source: NOAA 7
8 Change in October 2013 March 2014 Midwest Propane Consumption Relative to Last Year The 2013/2014 winter propane consumption in the Midwest was 490 million gallons higher than the previous year Grain Drying: 245 million gallons Cold Weather: 245 million gallons And about 420 million gallons higher than it would have been with normal weather: Grain Drying: 145 million gallons Cold Weather: 275 million gallons Source: ICF
The Growth in Domestic Production has Driven a Long Term Change in Imports and Exports 9 5,000 U.S. International Propane Trade Trends 4,500 Imports Exports 4,000 Million Gallons per Year 3,500 3,000 2,500 2,000 1,500 1,000 500 - Source: U.S. International Trade Commission
Propane Exports Doubled After the 2013 Terminal Expansions Came On-line 10 New Targa Refrigerated Capacity +120 MBPD Enterprise Expansion +115 MBPD Enterprise Debottlenecking +30 MBPD 2.6 billion gallons in 2012 4.6 billion gallons in 2013
Annual Change in Propane Exports Relative to Annual Change in U.S. Propane Production 11
12 Nationally, Propane Markets Balanced Due To Inventory Drawdowns Propane inventories started the heating season at normal levels In 2013 inventories fell by 864 million gallons relative year end 2012 inventory levels. Midwest inventories set new 10-year low inventory levels at the end of the winter 2013/14 Winter Inventories
Capacity and Storage Constraints Limited Propane Supply Delays in gas plant start-ups reduced propane production below planned volumes. Targa was in the market purchasing propane during the fourth quarter of 2013 to meet export contract commitments Upper Midwest storage facilities did not start the season full Infill constraints and other factors. Several Midwest refinery and gas processing plants were off-line Routine maintenance, construction shut-downs during expansion, Fractionation outages at Mont Belvieu reduced propane production below planned volumes. Storage deliverability started to decline as storage volumes reach critical levels. 13
How Will Consumers React to the 2013/14 Winter? 14 How many residential propane customers will look at last winter s propane bills, and decide to switch? How many potential propane customers heard about supply shortages this winter and lost confidence in propane? Competitors are reminding consumers about this winter. Source: Virginia Farm Bureau News, January 2014.
15 Propane Households Continue to Decline Propane households declined by more than one million in the last 10 years 68,000 in 2012 Average decline of 1.5 percent per year since 2008
16 Nationally, Growth in Internal Combustion Engines Forecasted to Keep Consumer Propane Demand Flat ICF is currently projecting relatively flat consumer propane demand through 2020 Demand in traditional segments of propane demand is projected to fall. Offset by growth in Internal Combustion Engine markets The projection does not yet incorporate the impact of last winter on consumer perceptions of propane
Propane Production Growth ICF forecasts total North American production of propane from gas processing plants to grow from 14.8 billion gallons in 2013 to 25.6 billion gallons in 2020 Production growth is broadbased: Bakken (ND, MT) to produce 2.5 billion gallons of propane per year by 2020. Marcellus/Utica production expected to increase from 700 million gallons in 2013 to 6.5 billion gallons in 2020 Continuing strong growth in Eagle Ford, and rebound in Western Canadian production Source: ICF 17
Planned Export Terminals Significantly Add to Current Export Capacity Company Capacity (MMGal/yr) Location Start-up Cost* ($Million) Targa Resources 1,840 Galena Park, TX 2014, Q3 240 Sunoco Logistics LP 620 Marcus Hook, PA 2014, Q3 270 Sunoco Logistics LP 1,400 Nederland, TX 2015, Q1 400 Occidental 1,150 Corpus Christi, TX 2015, Q1 400 Enterprise 760 Houston Ship Channel, TX 2015, Q1 100 Enterprise 3,500 Houston Ship Channel, TX 2015, Q4 500 Phillips66 2,200 Freeport, TX 2016, Q3 1,000 Petrogas 460 Ferndale, WA 2014, Q3 242 Pembina Pipeline Co. 620 Prince Rupert, BC 2016, Q1 320 Sage Midstream 720 Longview, WA 2016, Q4 275 Pembina Pipeline Co. 570 Portland, OR 2018 500 Total Proposed 13,840 $4,250 Current + Proposed 20,440 ICF estimates Project capacity reduced to account for terminal/pipeline capacity utilized for non-lpg exports 18
Planned/Existing Propane Dehydrogenation Facilities Company Output Volume (tons/yr) Propane Consumption (Mil. Gal/yr) Location Start-up Year PetroLogistics 640,000 460 Houston, TX 2010 Dow Chemical 750,000 540 Freeport, TX 2015 C3 (Ascend) Petrochemicals 1,000,000 720 Alvin, TX 2015 Enterprise 760,000 540 Mont Belvieu, TX 2016 Williams 500,000 360 Redwater, AB 2016 Formosa Plastics 660,000 470 Point Comfort, TX 2016 REXtac 300,000 210 Odessa, TX 2017 Dow Chemical 550,000 380 TX/LA 2018 Enterprise?? Mont Belvieu, TX Potential Expansion PetroLogistics 640,000 460 Houston, TX Postponed Total 5.48 million 4,140+ 19
Change in Propane Export Capacity Relative to Change in U.S. Propane Production New PDH Capacity Total Announced Export Capacity Expected* Export Capacity North American export capacity undergoing a dramatic expansion Not all capacity will go to propane Demand growth also to come from petrochemical industry Strong likelihood any new capacity will be 100% utilized * Expected export capacity reflects ICF s assessment of likelihood of project completion and share of project capacity allocated to propane. 20 20
Changes in Propane Economics when Export Capacity is Greater than Supply 21 The availability of additional propane export capacity does not guarantee that the capacity will be used. Instead, it links the domestic propane market to the international propane market. Domestic and international prices will equilibrate Propane will flow to the markets that value it the most. As an exporter, domestic propane prices will be below international prices rather than above international prices. Price volatility is likely to increase. Seasonal stock builds for winter demand will no longer be automatic. Propane in storage will not automatically be available to the domestic market. Will require contracted storage, or price bidding into the market.
Broad Energy Market Trends Reducing Seasonal Propane Transportation Capacity 22 Propane Production and Exports Northeast propane production Moving propane to Mont Belvieu Ethane Production and Demand Moving ethane to the Gulf Coast demand centers Canadian Diluent Demand Rapid growth in demand to serve Alberta oil sands industry High load factor load is displacing seasonally available capacity on liquids pipelines Pipeline Conversions
Changes on the TEPPCO Pipeline Affecting Propane Services into the Northeast 23 Expansion of Storage Growth in Marcellus Propane Production Outage at ETS Todhunter, OH Propane Storage Facility Reversal of TEPPCO s line for ethane service (ATEX) Growth in Priority Diluent Transportation Source: Answer of Enterprise TE Products Pipeline Company LLC to Complaint of Thrifty Propane, Inc., United States of America Before the Federal Energy Regulatory Commission, Thrifty Propane vs. Enterprise TE Products Pipeline Company LLC. May 21, 2012. Appendix A
24 The Cochin Pipeline The Cochin Pipeline provides a direct link between Alberta propane production. Propane storage in Alberta. And the U.S. Midwest propane market The Cochin delivered about 320 million gallons of propane to the Midwest in 2013 Source: Kinder Morgan
Why Cochin Matters Lack of Cochin will push Midwest marketers to supply sources further east Fort Whyte Griffith Reduction in available capacity for seasonal or peak period demands in the Midwest Todhunter Coshocton Potential to create supply disruptions in the Midwest 25
Deliveries on the Cochin System In 2008, annual capacity utilization was about 30% Capacity of 78,000 barrels per day Shipments on the Cochin system dropped dramatically after 2009 2013 deliveries returned closer to historic norms Normal 2012/2013 winter Strong grain-drying demand in 2013 Source: Canada s National Energy Board, ICF 26
Deliveries on the Cochin System Pipeline Capacity The Cochin Pipeline provides direct access to the major NGL storage facilities in Alberta 5.2 million barrels (220 million gallons) of usable propane storage capacity Source: Canada s National Energy Board, ICF The combination of excess pipeline capacity, and direct access to major storage facilities, allowed the Cochin Pipeline to provide annual and seasonal swing delivery capacity directly into the Midwest 27
28 Can Rail Take Up the Slack? Rail requirements: Rail system capacity Propane capable rail cars Rail loading capacity Rail unloading capacity Rail reliability concerns
29 Could Last Winter Happen Again? 1) Crop drying 2) Cold weather 3) Propane exports 4) Capacity outages and constraints 5) Canadian demand and inventory 6) Cochin Pipeline 7) The weather in Europe 8) Propane storage inventories
Will it Happen this Winter? Grain Drying Corn acreage is down, but yields are up Corn crop maturity is about where it was last year, with regional differences Propane inventories Nationally, significant build However, PADD 2 is still below average, and injections are slowing or gong negative Propane export capacity Growth will be slower than 2013; delays across the board The Cochin Pipeline is gone 30
PADD 2 and PADD 3 Propane Inventories As Of August 29, 2014 31 PADD 2 inventories started the heating season at the lowest level in the last five years. After a rapid rebound in spring, injections have slowed. Current levels are inching up to the 5-year average After rapid PADD 3 inventory build through August, levels reached 37.9 million barrels (4% above the previous 10-year high) Attractive butane prices induced reduced petchem consumption of propane. Strong production, early-season export facility maintenance, and delays in new terminal commissioning contributed to strong injections Recent drop due to Targa s commissioning of their terminal expansion
32 2014 Storage Injections PADD 2 Storage injections are moderately higher than the last three years. PADD 2 injections have averaged 796,000 barrels per week since start of April. Compared to an average of 670,000 for 2011 2013. PADD 3 storage additions turned negative in the 1 st week of September. After averaging 1,148,000 barrels per week through August, PADD 3 propane inventories declined 498 thousand barrels.
Corn Maturity Relative to 2013 (As of 09/07) Corn Crop Maturity Behind 2013 Crop Corn Crop Maturity Ahead of 2013 Crop *Corn Crop Maturity Measured as percentage of Growing Degree Days out of 2,700 for growing season to date 33
Corn Maturity Relative to 30-yr Average Corn Crop Maturity Behind 30-yr Average *Corn Crop Maturity Measured as percentage of Growing Degree Days out of 2,700 for growing season to date 34
The Propane Market Environment Has Changed 35 Propane production growth means that supply will be abundant However, it may not be where you need it when you need it Access to swing supplies during the winter is becoming more difficult due to changes in transportation infrastructure Growth in propane export capacity links U.S. markets with international markets Marketers will have to compete with international shippers to make sure propane stays where it is needed Propane supply and price volatility and uncertainty is likely to increase Summer storage builds at the major supply hubs will no longer be automatic U.S. role as a propane exporter means that U.S. propane prices will remain lower (on average) relative to crude oil than the historic norm Ensuring positive economics for propane engine fuel applications
36 Impacts on Demand Fundamental energy market trends continue to threaten traditional propane markets Propane prices will continue to drive declines in use per customer and switching away from propane in traditional markets Changes in energy technologies, including electrical and CNG technologies threaten propane market share The same energy market trends create opportunities to develop new propane markets Changes in engine fuel prices favor propane Propane is the logical alternative for many fuel oil markets Propane s advantages relative to gasoline, diesel and fuel oil should continue, however prices are likely to be volatile Any future propane supply shortages are likely to significantly damage propane markets
37 What Does it Mean For Marketers? Building additional flexibility and reliability into supply plans has become critical Consider new storage capacity Plan your supply strategy to build winter allocation Develop multiple sources of supply, particularly if you rely on rail Or trust your supplier(s) to have multiple sources of supply Building summer load is even more important than in the past Needed for building winter allocation Growth in propane export capacity and PDH capacity has the potential to cause significant disruptions in consumer propane supply, unless marketers contract for storage and supply, particularly in 2015 If you don t know where your propane supply is coming from, it may not be there when you need it.
Propane Residential Households Have Continued to Decline 38 Source: American Community Survey
North Carolina Primary Space Heating Fuels Between 2006 and 2012 the number of households reporting propane as a primary space heating fuel fell from 379,000 to 289,000 Market share fell from 10.96% to 7.74% Electricity grew from 1,829,000 to 2,267,000 households Reflecting a growth in market share from 52.96% to 60.75% Source: American Community Survey 39
In North Carolina, Growth in Emerging Markets Insufficient to Compensate for Residential Losses 40 Total 8.5% loss in propane sales, driven by 25% decline in residential sector On a net basis, over 50 thousand residential space heating customers lost Decline compounded by continuing efficiency improvements in remaining housing stock ICF projections include aggressive growth in internal combustion engine consumption Potential for significantly more growth
41 New Propane Market Opportunities Propane has an opportunity to develop major new markets wherever gasoline, diesel fuel, or fuel oil are widely used. Primary Growth Opportunities Heating oil conversions On-road vehicles Commercial mowers Irrigation engines With two general exceptions: 1,000 900 Internal Combustion Engine Propane Consumption in New Markets 1) where natural gas is available and appropriate. 2) Where the electric alternative is more attractive than the propane alternative. (Million Gallons) 800 700 600 500 400 300 200 100 0 Diesel Injection On-Road Vehicles Non-Road Engines
The Dixie Pipeline Source: Enterprise Product Partners, Response of Dixie Pipeline Company LLC to Motion of Dow Hydrocarbons and Resources and LLC before FERC, Jan. 16, 2012 42
43 Number of Propane Households in 2012 288,635 households in North Carolina reported using propane as a primary space heating fuel in 2012. There are 58 counties in North Carolina out of a total 100 where more than 2,000 households use propane for primary space heating.
44 Propane Market Share, by County, 2012 Propane held 20% or above market share in primary space heating in 23 North Carolina counties.
45 Fuel with Highest Market Share in 2012 Propane held the highest market share in primary space heating in 1 North Carolina county. In 95 of the 100 counties electricity had the highest share in primary space heating; natural gas and heating oil held only 2.
Fuel With Largest Market Share Loss Between 2009 and 2012 46 Propane lost market share in 85 out of the 100 counties. In 48 counties propane lost greater market share than any other fuel. Natural Gas lost market share in 40 counties. In 39 of these counties, electricity made the largest market share gains. Heating oil lost market share in 95 out of the 100 counties. Even electricity lost market share in 9 counties across North Carolina
Fuel With Largest Market Share Gain Between 2009 and 2012 47 Propane gained market share in 15 North Carolina counties between 2009 and 2012, though it did not make the largest gains in any county. Wood gained market share in 40 counties, including 34 counties where propane lost market share Electricity gained greatest market share in 86 North Carolina counties between 2009 and 2012.
Housing Permits Activity in North Carolina Strong 48 U.S. Average share of permits issued for new housing construction at just 0.3% of existing housing stock In North Carolina, average housing permits to existing housing stock is 0.75%
Growing Housing Market and High Propane + Heating Oil Market Share Coincide 49 Activity in counties with above 10% market share for combined propane and heating oil In North Carolina, permits issued in high propane + heating oil counties is 0.71% of existing households, vs. 0.39% for the U.S. total
50 Shock and Aftershock: A Look at this Last Winter and the Outlook for Future Supply Disruptions September 16, 2014 By: Warren Wilczewski ICF International WWilczewski@icfi.com 703-225-2861 Disclaimer: This presentation presents the views of ICF International. The presentation includes forward-looking statements and projections. ICF has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual market results to differ materially from the projections, anticipated results or other expectations expressed in this presentation.
51 Shock and Aftershock: A Look at this Last Winter and the Outlook for Future Supply Disruptions Prepared for the North Carolina Propane Gas Association September 16, 2014 Presented by: Warren Wilczewski ICF International 9300 Lee Highway Fairfax Virginia 22031