July 13, 2014 at 5:28 pm

U.S. considers a strategic propane reserve

Watkins Glen, N.Y. America is awash in propane, a byproduct of booming oil and natural gas production. Yet getting it to markets at home and abroad is challenging and controversial.

Long a niche in the energy sector, propane today is sexy. Record exports and supply disruptions this past winter have refocused attention on propane, after prices went through the roof for consumers, businesses and farmers alike.

Congress and the Obama administration are studying a possible strategic propane reserve, to function like the ones for crude oil and home heating oil. Efforts to create additional private-sector propane storage are resisted at the local and state levels.

"If they could do it with heating oil they could certainly do it with propane," said Andrew Heaney, chief executive of Propane.pro, a national online marketplace that connects buyers and sellers of residential propane. "This is a vital fuel type, and there is a real danger of having another shortage. ... It just makes sense to put some kind of buffer into the system. It's just common sense. It's an insurance policy against disaster."

About 50 million homes use propane for winter heating, water heaters, stoves and other appliances. Far from being a winter product used just in homes across the Midwest or New England states, propane has many farm and commercial uses. California, Florida, Illinois and North Carolina are among the largest users of propane.

America's ongoing energy boom has meant a rapid rise in propane production. Propane is a hydrocarbon byproduct of the cleaning process in natural gas production and of petroleum refining.

Because of its ready availability and a growing global demand for it, drillers in such places as Texas, North Dakota, Ohio and Pennsylvania are increasingly producing liquefied petroleum gases, namely propane and butane.

The supply of LPG exceeds the American demand for it. Companies are racing to export the excess to Latin America, Europe and Asia. New export terminals are planned for such places as Beaumont, Texas, and Longview, Wash.

The Energy Information Administration projected last year that LPG exports would rise from about 100,000 barrels per day in 2011 to half a million barrels per day by 2017. U.S. exports hit a record 302,000 bpd last year, well on the way.

In contrast, U.S. demand for propane last November were more than 1.8 million barrels per day, powered by demand for propane to dry a record corn crop. Another record or near-record crop is projected for 2014.

Despite the boom, homeowners across the nation either couldn't get propane last winter or paid dearly for it. Facing a national supply crisis in February, federal regulators intervened, ordering pipeline operators to give priority to propane shipments to markets where some residents were without heat.

The winter crisis prompted a May 1 Senate hearing, triggered Energy Department studies and sparked calls for such measures as banning exports and creating a strategic reserve like those for oil, begun in 1974, and home heating oil, begun in 2000.

"The macro situation is that there are still no restrictions on export of propane, no controls on export of propane. The government has no idea how much propane there is in the country until it's too late," Heaney said, arguing for a strategic reserve. "What we saw last winter was an absolute disaster. The public is no less exposed at this point than it was at the beginning of last winter!"

"The real culprit is storage," said Joe Rose, president of the Propane Gas Association of New England, arguing that whether it's through the government or the private sector, more propane must be set aside over the lower-use summer months to assure sufficient supplies during the winter.

Steve Ahrens agreed. Ahrens, executive director of the Missouri Propane Gas Association, said he'd like to see more storage as a buffer and closer oversight of supplies and pricing after last year's harsh winter.

"We certainly felt it was a natural disaster, like a hurricane or tornado, and that people should not be profit-taking," said Ahrens, whose state uses propane on farms and to heat 1 in 10 homes.

"If you put a dollar amount on all the pain and suffering ... last year, you might be able to support some sort of government purchase of propane through the summer to build those inventories."

Propane inventories in the Midwest were lower than last year's averages for much of the spring, keeping prices high. Storage has now slightly passed last summer's levels, suggesting some relief, but the buildup before winter will be key to next winter's prices. Low storage levels will likely mean high prices, Ahrens said.

"That's how markets allocate a scarce resource," he said.

Except that propane isn't scarce. It's being produced and exported in record amounts.

That might explain why the Obama administration has said little about the idea of a strategic reserve for propane. The U.S. Department of Energy declined to make anyone available to discuss the matter.

At the Senate hearing in May, the agency's director of energy policy testified that the crude and home heating reserves were created when energy supplies were scarce, which is not the case with propane.

"Reserves are certainly something we will be looking at," Melanie Kenderdine said in noncommittal testimony.

An alternative to a strategic reserve is simply more private-sector storage, perhaps in the Finger Lakes region of southern New York. In the village of Watkins Glen, Crestwood Midstream Energy has tried for several years to open a propane storage operation in salt caverns that were used for decades to store natural gas and propane.

The facility would have a storage capacity of 2.1 million barrels. That's about half of what had been stored there. The project has cleared all federal hurdles but remains under study by the New York state Department of Environmental Conservation.

"The balancing benefits of our Finger Lakes storage project will extend far beyond New York and the neighboring New England and mid-Atlantic markets," said Bill Gautreaux, the president of liquid gases for Crestwood Midstream Partners LP.

After years of state delay, the Schuyler County Legislature passed a resolution June 9 that calls on the department to make a decision on the project.

"This is an ongoing project," Peter Constantakes, a Department of Environmental Conservation spokesman, said in declining to make experts available.

Many locals oppose the storage project because of its proximity to the 38-mile Seneca Lake, a major tourist draw.

"I'm just worried about pollution into the lake. People from all over come here," said Lorraine Selkirk, a chiropractor. "If they could find somewhere else I'd be OK with it."

Politicians are hedging their bets. They want the jobs and tax revenue that the storage project would bring, but are mindful that residents worry about soiling a treasure.

"The biggest frustration for all sides is how long it's taken for a decision to be made," said Philip Palmesano, the area's state assemblyman, who was interviewed in Albany, the state capital. "Quite frankly, I think it's sitting until after the elections" in November.

It's a similar story in Newington, N.H., where a local port terminal operator, Sea-3, seeks to expand its Shattuck Way terminal to handle more propane. After more than half a year of discussion, local planners approved the expansion May 19 but now face appeals.

Pan Am Railways, a regional railroad that serves the port, has pledged to upgrade its line as the volumes of propane grow. The Sea-3 terminal used to bring in propane on barges from Europe, but now it hopes to bring it in by rail, and then distribute it across New England by truck.

"Propane is something that's definitely increased," said Cynthia Scarano, Pan Am's executive vice president, who said that twice-a-week shipments might grow to six. "As far as shipping it by rail, more of it is coming from within the country now."