How long will the propane shortage last and how to position for the Short and Long haul

1. Reviewing the 2013 - 2014
Propane Markets: A Look at the
Numbers – and a Look at the
Future
February 3, 2014
Michael Sloan
Principal
ICF International
703-218-2758
Michael.Sloan@icfi.com

2. Propane Shortages (and Prices) Are Making the
Evening News
 Widespread talk of shortages
and high prices at the retail
level.
―
Wholesale propane prices in
the Midwest have tripled in
the last two weeks.

―
Conway reached nearly $5 per gallon
before falling back to $2.45 per gallon
Residential prices reported by
DOE for the Midwest states
have doubled in the last four
weeks.
 Significant concern at the
national and state government
level.
―
2
Widespread propane industry
involvement at both the state
and federal level.

3. This Presentation is About the Numbers
1) Review of primary near term propane market drivers
2) A more focused look at the numbers and the markets this
winter.
― The supply balance in the midwest
― Markets and prices .
3) Looking forward: If this year has been bad (and it has),
what will the future look like.
3

4. NEAR TERM PROPANE MARKETS
IN 2013, U.S. PROPANE PRODUCTION
INCREASED BY 1.4 BILLION GALLONS
SO WHY ARE WE SHORT OF SUPPLY?
1) Crop Drying
2) Cold Weather
3) Cargo Exports
4) Capacity Constraints
4

5. 2013 Grain Drying Demand Drew Down Secondary and
Tertiary Propane Inventories, particularly in the Midwest
 The 2013 Harvest Season:
―
―
The 2013 corn harvest was about
13.9 billion bushels, a historical
record.
Cooler than normal weather in July
and August delayed the harvest.
― In October, the corn belt received
above-average rainfall, with the
first week of October at 200 to 500
percent of normal precipitation.
 ICF estimates total grain-drying
demand for propane at 300 –
350 million gallons
―
5
235 – 285 million gallons above 2012
levels.

6. Weather: 2013 Heating Degree Days Above Historical
Norms, and Significantly Above Last Year
 Through to January,
reported HDDs for the
current heating season
are:
― 3.1% above NOAA’s 30year Average
― 10.1% above the
2012/2013 Heating Season
― 15.0% above the
2011/2012 Heating Season
 ICF estimates impact
of colder weather in 2013
relative to 2012 to be 640
million gallons.
6

7. Propane Exports Doubled After the 2013 Terminal
Expansions Came On-line
New Targa Refrigerated
Capacity
+120 MBPD
Enterprise
Expansion
+115 MBPD
Enterprise
Debottlenecking
+30 MBPD
2.6 billion gallons in 2012
4.5 billion gallons in 2013
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8. U.S. Propane Exports are Driving Domestic and
International Propane Markets
Increasing
U.S exports have
narrowed the spread between U.S.
and European propane prices.
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And
are starting to put pressure
on international propane prices
relative to crude oil.

9. In 2013, U.S. Propane Production Increased by 1.4
Billion Gallons. So Why are We Short of Supply?
1) Crop Drying
― +235 million
gallons
Changes in Propane Supply Balance Between 2012 and
2013 (Million Gallons)
2012
2013
(Estimated) Change
2) Colder Weather
― +640 million
gallons
Total Propane Supplied
U.S. Natural Gas Plant Production
U.S. Refinery Production
U.S. Propane Imports
U.S. Propane Stock Drawdown
16,265
10,950
4,227
1,644
(556)
18,657
12,250
4,290
1,254
864
2,393
1,300
63
(390)
1,420
3) Cargo Exports
― +1.9 billion
gallons
Total Propane Consumption
U.S Consumer Demand (exc. Grain Drying)
U.S. Grain Drying Demand
U.S. Petrochemical Demand
13,644
7,755
65
5,824
14,180
8,396
300
5,484
535
641
235
(341)
4) Stock Drawdown
― -1.4 billion
gallons
Propane Exports
2,620
4,478
9
1,857
Note: Improvements in efficiency and other market changes offset
about 80 million gallons of consumer propane demand in 2013.
2013 estimated by ICF: All values based on preliminary data and ICF
forecasts, and will change as additional data becomes available.

10. In 2013, Propane Markets Balanced Due To Inventory
Drawdowns
 In 2013 inventories fell
by 864 million gallons
relative year end 2012
inventory levels.
― Propane inventory levels
are currently below 10year seasonal lows.
 Propane inventories
started the heating
season at normal levels
10

11. Change in U.S. October 2013-January 2014 Propane
Consumption Relative to Last Year
 ICF estimates that between
October 2013 and January
2014, total U.S. propane
demand increased by about
450 million gallons relative to
the same period in the
previous year:
― Grain Drying: 235 million
gallons
― Cold Weather: 215 million
gallons
11

12. Change in Midwest (PADD 2) 2013/14 Heating Season
Demand
 ICF estimates that between
October 2013 and January
2014, propane demand in the
Midwest increased by 390
million gallons (9.5 million
barrels) relative to the same
period in the previous year:
― Grain Drying: 225 million
gallons
― Cold Weather: 165 million
gallons
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13. Propane Supplies into the Midwest have been Constrained by
Production and Transportation Outages and Limitations
 Constrained Capacity on Cochin Pipeline
― Out of service for three weeks (November 27- December 17).
― Currently flowing below capacity due to high Canadian demand for
propane.
 Removal from service of Todhunter storage capacity in Ohio
― Reduced PADD 2 propane storage by about 0.8 – 0.9 million barrels.
 Reversal of TEPPCO line for ATEX Pipeline has created congested flows on
the remaining TEPPCO system.
― Scheduling propane shipments along with other products.
 Several Midwest refinery and gas processing plants have been offline for
routine maintenance and other reasons.
 Fractionation outages at Mont Belvieu have reduced propane production.
 Storage deliverability has started to decline as storage volumes reach critical
levels.
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14. What is the Shortfall in Midwest (PADD 2) Supply
October - January
Million
Barrels
Million
Gallons
Increase in Midwest Demand
+ 9.3
+ 390
Changes in PADD 2 Supply
+ 2.9
+ 120
Decline in PADD 2 Production
+ 0.7
+
30
Cochin Pipeline Shutdown and
Capacity Constraints
+ 2.2
+
90
+ 3.3
+ 140
Todhunter Storage
- 0.9
-
Other Storage
+ 4.2
+ 180
+ 8.8
+ 370
50
2,100
Increase in Stock Withdrawals
Increase in Midwest Requirements
Total Midwest Requirements
40
Estimated by ICF: All values based on preliminary data and ICF forecasts, and will change as
additional data becomes available.
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15. Remaining Inventories in PADD 2 and PADD 3
 PADD 2 Inventories are below
5-year minimum, normally seen
in mid-March, near end of heating
season
8,789 MBBL
Ten-Year Minimum, Mar.
wk 2 2008, 7,951 MBBL
 At January withdrawal rates,
current PADD 2 inventory is 5
days away from 10-year
minimum level.
 PADD 3 inventories are at 5year minimums for this time of
year.
 17.4 million barrels below 3rd
Week January 2013 levels.
14,924
MBBL
Ten-Year Minimum, Feb.
wk 4, 2004. 10,134 MBBL
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 At January withdrawal rates,
current PADD 3 inventory is 28
days away from 10-year
minimum level.

16. Market Price Response
Increasing U.S. Propane Exports
have reduced the price spread
between the U.S. and Europe
The price spread between Mont Belvieu
and Conway shifted as PADD 2 Inventories
started to fall below normal levels
Source: Bloomberg, 2014-01-30, ICF Analysis
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17. LONGER TERM OUTLOOK FOR
PROPANE SUPPLY
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18. ICF Forecast of Propane Production from Natural
Gas Liquids
Propane From North American NGLs
(million barrels):
 333 in 2013
 552 in 2020
 628 in 2025
 Marcellus & Utica propane output
grows from 16 million barrels in
2013 to 124 million barrels in
2025.
 Bakken (North Dakota and
Montana) production over 57
million barrels in 2025.
 Niobrara (Rockies) production
increases from zero in 2010 to
nearly 24 million barrels in 2025.
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19. Planned Export Terminals Significantly Add to
Current Export Capacity
Company
Export
Capacity Mil.
Gallons/m
Location
Cost
($Million)
Start-up *Estimated
Targa
154
Galena Park, TX
2014, Q3
$240
Sunoco Logistics LP
51
Marcus Hook, PA
2014, Q3
$270
Occidental
96
Corpus Christi, TX
2015, Q1
$400
Sunoco Logistics LP
253
Nederland, TX
2015, Q1
$400*
Enterprise
63
Houston Ship Channel, TX
2015, Q1
$100*
Pembina Pipeline Co.
51
Prince Rupert, BC
2015, Q3
$320*
Boardwalk
128
Moss Lake, LA
2015, Q4
$700*
Enterprise
291
TX/LA
2015, Q4
$500*
Phillips66
185
Freeport, TX
2016, Q3
$1,000
Total Proposed
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1,272
$3,930*

20. Existing and Proposed PDH and Export Capacity is
Likely to Exceed Propane Supply
20

21. Economics of Export Capacity Greater Than Supply
 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, (at least on a rough
basis).
― Propane will stay in domestic markets -- if the domestic price is high
enough.
 Price volatility is likely to increase.
 Propane in storage will not automatically be available to the domestic market.
― Will require price bidding, or contracted storage.
 Seasonal stock builds for winter demand will no longer be automatic.
― Seasonality of international demand will impact domestic markets
 Asian demand will have limited seasonality
 Central and South American demand generally countercyclical.
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22. Economics of Limiting Exports
 Limiting propane exports will reduce domestic propane prices, and increase
International propane prices. Lower domestic prices:
―
Benefit propane consumers
―
Probably benefit the petrochemical industry
―
But will hurt producers, traders, exporters….
 Return to traditional seasonal supply/demand and inventory patterns.
 Indirect impacts are complex, but likely would offset some of the benefits to
consumers.
―
Lower domestic prices will reduce the overall value of natural gas and liquids
production, and will reduce natural gas and liquids production.
―
Lower ethane production increases ethane prices, potentially shifting petrochemical
feedstock demand from ethane to propane.
―
Lower domestic propane prices (and higher international propane prices) drive growth
in domestic PDH facilities and propylene exports.
 Some economic theories suggest limiting exports would slow overall economic
growth.
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23. Cochin Pipeline Reversal
 Cochin is a major source of
propane supply into Midwest
markets.
 Current Cochin pipeline
capacity at almost 1.2 billion
gallons per year
 Recent annual propane
throughput to U.S. has
averaged around 300 million
gallons per year.
 A major source of incremental
supply to meet unusual swings
in demand
 Grain drying
 Cold weather
Estimated Cochin Flows for
U.S. Delivery
 Access to propane storage
capacity in Western Canada
 Cochin will be taken out of
propane service in March/April
2014
Source: EIA Petroleum Imports Database, propane receipts at Portal and Sherwood, ND
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24. Cochin Pipeline Reversal
 The annual loss of supply into the Midwest due to the Cochin reversal is
roughly equivalent to the amount of propane needed to meeting this year’s
grain drying demand.
 However, while reversal of Cochin removes the readily defined path to market
for Alberta propane, it does not remove or reduce the supply of propane.
― Likely to reduce propane prices in Alberta, indirectly reducing supply.
 Excess Alberta propane will find a market.
― Injection into the Alliance Pipeline for removal at the AuxSable plant near
Chicago.
― Rail and truck transport out of Alberta
― Waterborne export markets from British Columbia
 Hence, more markets will be competing for the supply, and the supply
transportation infrastructure will be slower and less reliable.
― Less supply certainty
― More price volatility
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