Propane: winter shortages in 2014

Propane is widely used as a fuel -- but shortages this past winter led to an unprecedented emergency in the eyes of federal regulators.

Propane is a hydrocarbon produced as a byproduct from natural gas processing and crude oil refining.   Also known as liquefied petroleum gas, this natural gas liquid serves as a fuel in homes, businesses, and industry.  It is used for heating, cooling, cooking, motor vehicle transportation, and agriculture.  In the U.S., propane is transported on a network of pipelines stretching 56,000 miles long, and can also be shipped by rail and by truck.  In recent years, the U.S. propane industry has reached $10 billion in annual activity, with consumers using 15 billion gallons of propane annually for home, agricultural, industrial, and commercial uses.

A marker showing the location of an underground natural gas pipeline near Memphis, Tennessee.

This past winter, a propane shortage affected 24 states, primarily in the Midwest and Northeast regions.  Stored supplies of propane declined in the Midwest, and prices in some places increased by over 50% between January and February 2014.  As forecasts called for continued unseasonably cold weather, local, state, and federal agencies declared states of emergency.  The Federal Motor Carrier Safety Administration issued and extended emergency exemptions to provide regulatory relief for commercial motor vehicle operations directly supporting the delivery of propane and home heating fuels to areas under emergency, ultimately resulting in Congress's enactment of the Home Heating Emergency Assistance Through Transportation Act of 2014.

While the Federal Energy Regulatory Commission regulates neither propane as a commodity nor its storage or marketing, the Commission does regulate the transportation of propane on pipelines.  As this past winter's crisis deepened, some pipelines serving the Midwest voluntarily filed for permission to flow more propane into the region, but this was insufficient to meet demand.

In an unprecedented move, the Federal Energy Regulatory Commission exercised its emergency powers under the Interstate Commerce Act to require a pipeline company to temporarily provide priority treatment to propane shipments from Mont Belvieu, Texas, to locations in the Midwest and Northeast to help alleviate the shortage of propane supplies in those regions.  Citing school closures due to lack of heat, price hikes leading states to provide emergency heating assistance to those who could not afford fuel costs, and economic impacts on chicken farmers, pig farmers, and dairy farms in the South and Midwest who use propane to maintain the livelihood and health of their stock, the Commission found that an emergency existed requiring immediate action.

To address the emergency, the Commission targeted a pipeline owned by Enterprise TE Products Pipeline Company, LLC. In a February 7, 2014, Order Directing Priority Treatment, the Commission required the pipeline company to prioritize the shipment of propane on its natural gas liquids pipeline from the Mont Belvieu hub into the Midwest and Northeast.  That initial order provided for priority treatment for 7 days, which was extended once for another 7 days.

These actions apparently relieved the emergency.  According to testimony provided to the U.S. Senate Committee on Energy and Natural Resources by Commission staff member Nils Nichols, "no further action by the Commission with respect to propane supply was required this past winter."

Will propane again be in short supply next winter?  Will markets respond to align supply and demand at a reasonable price?  Will further regulatory action affect the U.S. propane industry?

Hurricane Isaac disrupts Gulf energy production

Hurricane Isaac has already disrupted energy production in the Gulf of Mexico -- and is likely to cause further damage when it makes landfall late tonight or tomorrow morning.

As I noted yesterday, the storm's path across the Gulf as Tropical Storm Isaac has already caused most oil and natural gas producers in the Gulf to shut in their wells; temporarily halting the production of these fuels from the Gulf.  As of yesterday, producers had shut in 78% of Gulf oil production and 48% percent of natural gas production.  Data released today by the federal Bureau of Safety and Environmental Enforcement shows about 93.28% of the current daily oil production in the Gulf of Mexico has been shut-in, as has about 66.7% of the current daily natural gas production in the Gulf.

Offshore hydrocarbon resources in the Gulf of Mexico play a significant role in U.S. fuel production.  According to the U.S. Energy Information Administration (EIA), about 23% of all U.S. crude oil production comes from the Gulf, as does about 7% of U.S. dry natural gas production.

Subject to tropical storms and hurricanes, Gulf oil and gas production is periodically interrupted due to severe weather.  For example, EIA data shows that at its peak, 2005's Hurricane Katrina caused producers to shut in 539,074 barrels of oil production per day -- about half the amount of shut-in production as Tropical Storm Isaac caused yesterday.  EIA data also shows that up to 3,228 cubic feet per day of natural gas production was shut in as a result of Katrina, or about one-and-a-half times as much gas per day as has been shut in due to Isaac so far.  Four months after Katrina hit, 2,155 oil and gas wells, or 36.2 percent of the wells in the region, reportedly remained shut-in and incapable of producing.  Understanding the full comparative impact of these storms will require knowing when the production shut-in by Isaac can come back online, but it is clear that Hurricane Isaac is a force to be reckoned with.

Previous storms, such as Hurricane Katrina, also caused significant damage to onshore energy infrastructure like oil refineries.  At its peak, Katrina reportedly caused 4.5 million barrels per day of refining capacity to be shuttered; four months later, refinery shutdowns in the Gulf of Mexico region still totaled 367,000 barrels per day.

In preparation for Hurricane Isaac's landfall, several large Gulf Coast refineries have announced closures, with estimates suggesting a total of 1.1 million barrels per day of shutdown refining capacity or about half of the refining in the storm's path.  While Isaac is expected to remain a Category 1 hurricane, and thus may pack less of a punch than Category 3 Katrina, Isaac's impending landfall comes swiftly on the heels of a significant refinery explosion and fire in Venezuela.  Consumers can expect gasoline prices to trend higher in the near term.