November 28, 2007 — Propane Paused

The South Atlantic propane market didn't melt down after losing its only pipeline in November
By Charles Gerena

A single 12-inch pipeline carries propane through seven Southern states, transporting the commodity from Texas to a small town called Apex just west of Raleigh, N.C.

What happens when that pipeline shuts down for 11 days? A section of the line in Mississippi ruptured earlier this month, sparking a deadly explosion and a fire that burned for two days.

According to the U.S. Department of Energy (DOE), residential prices for propane in its Lower Atlantic region — which includes Virginia, West Virginia, North Carolina, and South Carolina — spiked 8.6 percent between Oct. 29 (three days before the explosion) and Nov. 12 (the day the pipeline reopened). Wholesale prices rose 6.3 percent over the same reporting period. In both cases, the price increases outpaced the nation as a whole.

But the disruption was temporary. With winter approaching, other supply factors as well as normal demand factors have had a greater impact. Propane is more expensive this year mainly due to higher prices for crude oil, since propane is a byproduct of petroleum refining as well as natural gas processing. Also, the higher cost of diesel fuel has increased the cost of transporting propane by truck.

The petrochemical industry is the biggest user of propane. Households and commercial businesses are the second-largest users, yet they often influence market prices more since their demand is seasonal. During the cold winter months, people use more propane for heat, hot water, and cooking, pushing prices up and causing petrochemical producers to switch to less desirable but cheaper feedstocks.

Agriculture is another major source of seasonal demand. Propane is used to dry crops before they are sold, to keep chickens warm during their incubation and early stages of growth, and to fuel equipment.

"You can use it anywhere you want because it's contained in its own bottle," notes David Hinton, a petroleum industry analyst at the DOE's Energy Information Administration. "You can take a tank out in the middle of a field, hook something up to it, and you have power."

In general, propane use is greater outside of metropolitan areas where natural gas service is unavailable, Hinton says. "Where the gas lines end, the propane markets begin."

Homeowners and farmers are the primary markets for propane in the Southeast/Mid-Atlantic region, according to Bard Black, a consultant at Kansas-based Propane Resources. The region also has above-average growth in propane use. "A lot of people are retiring in that area," Black explains. Agricultural demand has been falling due to the decline in tobacco farming, which uses propane to cure leaves. As for petrochemical use, that market is more dominant in the Gulf Coast.

Higher propane prices could encourage additional foreign imports in the future, but they won't prompt a surge in production domestically. Supply is usually slow to respond to changes in demand since there are no factories dedicated to producing propane, only gas and oil processors for which selling petroleum byproducts is a secondary consideration.

"That's why you have inventories … you build up during the off-season," Hinton notes. "Pipelines and local storage are also very important."

The pipeline shutdown in November had little real effect on supply. Dealers in South Carolina were concerned about the impact of losing their only propane pipeline, says Billy Smith, executive director of the state's propane gas association, "but it was back in service before dealers got into a tight supply." A few firms with only a small inventory had to get propane delivered by railcar or truck, but "that was the exception instead of the rule."

Mary Howell, communications coordinator for the Virginia Propane Gas Association, says communities in the southeastern part of the state were probably more affected by the shutdown since they truck in propane from the pipeline's Apex terminal. Some suppliers told her they had to drive as far as Ohio to get propane. However, the northern and western parts of Virginia were able to obtain propane from other sources via railcar.

If the shutdown had lasted longer, Howell adds, propane suppliers might have been in trouble. "But I think everyone had enough on hand to get through it. And … they have a little time to catch up [on inventories] before we get the cold weather."

Rebuilding inventories might take longer than usual. The pipeline will be operating at a reduced capacity throughout the winter as determined by its owners and federal officials, reducing the available supply by as much as 30 percent.

A cold snap could make matters worse since the Southeast's primary storage supplies of propane — primarily located in the Gulf Coast — are below normal. Imports are lower and consumption by petrochemical producers is higher.

"If everything goes right and we have normal weather, then we'll get through it," Hinton says. "But if we get a little cold weather and we don't have a safety net, it will start to get a little dicey."