« Back to Get the Point main page

Propane Exports Are Taking Off:

Can Propane Supply Keep Up?

May 19, 2016 | By Sam Duran

Driven by rapid supply growth, U.S. propane inventories entered last winter at over 100 million barrels, a record high by a wide margin. Despite growing export capacity and volumes, relatively warm weather this past winter has helped to keep propane stocks at seasonally elevated levels. To put 2016 propane inventories in perspective, the U.S. exited this past winter -– when inventories should be at their low point -- with propane/propylene inventories just 3 million barrels below where the U.S. entered the winter of 2013/2014.

EIA Weekly Propane Stocks

One would think a weak energy price environment would be the recipe for reduced propane supply. Yet gas plant propane supply has held up relatively well; monthly EIA stats are showing propane supplies outperforming both natural gas and crude oil production over the past year.

Normalized Supply of US Propane (Gas Plant), Oil and Gas

This issue of Get the Point will explore what is driving propane production today, identify the key factors that will drive propane production in the U.S. over the upcoming year and discuss why understanding gas plant propane production is so important in today’s market environment.

U.S. Propane Market in a Nutshell

Start a Free Trial of PointLogic Energy's Pipeline Flow Data

Propane has a variety of uses and is the most dynamic market of the five natural gas liquids (NGL) products. Perhaps most familiar as the fuel for our grills, propane is also used to heat homes in rural communities, dry crops, run forklifts and as a feedstock to create petrochemicals in crackers and propane dehydrogenation (PDH) units. An increasingly large amount of propane has been exported to the global market where, like in the U.S., it’s both a fuel and a petrochemical feedstock.

The U.S. gets its propane supplies from NGL volumes processed from wet gas production which is fractionated into purity products. However, a significant portion of U.S. propane supply also comes from crude oil processed in refineries and through imports from Canada.

Like the situation in natural gas, the shale revolution has created a glut of propane supply. Since the frigid winter of 2013/2014 left propane inventories at critically low levels, inventories have surged above historic levels, and prices have been relatively weak. U.S. exports have increased, but the propane market has also relied on price sensitive demand in ethylene crackers to balance growing gas plant propane supply. This past winter, new export capacity from Enterprise and new PDH capacity from Dow Chemical (to a lesser extent) have increased the U.S. market’s capacity to use and export propane.

Impact of Propane Exports

One might think with currently high propane inventories, the propane market is far from looking bullish. But with exports increasing to well over 800,000 barrels per day (b/d) this past winter, it’s conceivable to see the tables turn on propane. The chart below shows the ramp-up in propane exports, according to the EIA.

EIA Propane/Propylene Exports

Recently, EIA reported propane/propylene exports hit an unprecedented 884 Mb/d this past February, up from the 622 Mb/d in October 2015. This is clearly related to Enterprise expanding its export terminal capacity late last year by 230 Mb/d. To put this change in perspective, total supply of propane/propylene in February 2016 (including refinery supply and seasonal imports from Canada) was 1,905 Mb/d. Needless to say, relative to the overall size of the market, this change in export capabilities is massive. If exports can maintain these rates for the summer, the propane storage surplus can quickly evaporate. Further, if propane production doesn’t keep up, the propane market could swing from surplus to shortage.

Supply Going South in PADD 3

In previous issues of Get the Point, we’ve explained the importance of crude oil production to NGL production. The producing areas with the highest NGL content are typically those that contain rich gas associated with crude oil production. As a result, tracking propane production isn't as simple as just watching crude oil trends.

Petroleum Administration Defense District 3 (PADD 3) is a good example. Some regions have allowed propane production to buck the crude oil trend, but we’ll start with an area where propane production has actually performed worse than crude oil: PADD 3.

The chart below shows, relative to October production levels, how propane production is performing relative to oil and gas in PADD 3. After outperforming both and oil and gas for most of 2015, propane supply in PADD 3 is down 45 Mb/d, or roughly 8%, from October to February.

Normalized Supply of Propane (Gas Plant), Oil and Gas in PADD 3

A view of the change in wellhead gas supply in key PADD 3 producing areas from October to February might provide some insight into what is driving these declines in propane production. The chart below shows the change in modeled wellhead gas supply for that period in key producing areas in PADD 3.

Oct 15-Feb 16 Change in Gas Supply (PADD 3)

The most striking decline has been in the Gulf of Mexico, where gas production is down over 400 million cubic feet per day (MMcf/d). Surprisingly (or not, given the propane supply outcome), the strongest basin from October to February has been dry gas from the Haynesville Shale in Louisiana as production in the region recovered from flooding issues experienced in 2015.

Looking at key high GPM (gallons of NGLs per thousand cubic feet of gas) associated gas plays, the Eagle Ford oil and wet window demonstrated declines of 35 MMcf/d from October to February, while production in the Permian continues to be a strong point for PADD 3, growing 78 MMcf/d. This trend is in line with producer guidance; for example, Pioneer continues to tout its core acreage in the Sprabury/Wolfcamp geologies. The company plans to increase its production more than 30% year-on-year in the area.

An Interesting Balance in the Bakken

While propane supplies didn’t buck the trend in crude oil in PADD 3, the story is very different in North Dakota. Since mid-2015, supplies of crude have been in decline in the state, yet we’ve seen a very different outcome for propane supply in the Wisconsin, Minnesota, North Dakota and South Dakota Refining District. Despite the wide geographic area covered in this refining district, we know that hydrocarbon production in this region nearly all comes from the Williston Basin in North Dakota.

In the Williston Basin, associated gas and NGL supply are not only sensitive to crude oil production, but also to the amount of gas that is processed rather than flared. The chart below shows the normalized trend in propane, gas and oil production in North Dakota since the beginning of 2015.

Normalized Production of ND Propane, Oil and Gas

In OneOK’s fourth quarter 2015 earnings call this past February, the company projected year on year increases in Williston Basin gathered volumes in 2016 due to new infrastructure to capture flared gas. The chart below shows the math from OneOK. While gas and propane production have seemingly increased due to new capabilities to capture gas this year, the chart also implies that natural declines in crude and associated gas production could outpace the increases in additional captured volumes later in the year.

OneOK 4Q Earnings Call

Marcellus and Utica Trends

The Marcellus and Utica shales have been the some of the strongest forces behind propane production growth over the past year and have helped to offset declines in PADD 3 gas plant propane supplies. Using EIA data, the best way to measure Northeastern U.S. propane supplies is to look at EIA reported production in the Appalachia No. 1 and Indiana, Illinois and Kentucky Refining Districts. While it can’t be said that 100% of the gas plant supply in these two areas comes from the Marcellus and Utica shales, as processing plants like Aux Sable in the Chicago area also contribute to volumes in these regions, we’re hard pressed to find a better way to see how quickly propane supplies have risen in the Northeastern U.S.

Gas Plant Propane Supply in Northeast Refining Districts

Propane supply in Appalachia No. 1 (which encapsulates the Marcellus shale in Pennsylvania and West Virginia) Refining District wavered this winter, but ended on a strong note, generally staying on the 12-month trend. Things get interesting when we look at trends in the relationship between propane supply and natural gas supply in the Indiana, Illinois, Kentucky Refining District that includes the Utica, among other producing areas. The chart below shows a growing discrepancy between flow data for Utica production and propane supplies that can possibly be explained by an increased focus by producers on dry gas wells in Ohio.

Normalized Propane vs. Gas Supply in Ind. Ill. Ky. Refining District

From October to February, gas production within the Indiana, Illinois, Kentucky Refining District has increased by nearly 600 MMcf/d, nearly all driven by supply growth in the Utica Shale in Ohio. Yet propane production netted a 2 Mb/d decline over the same time period. Our friends at RBN Energy pointed out the potential driver of this trend in a great article last September -- that producers may be increasingly focused on dry gas wells in the area.

One of the main dry gas drillers in the Utica, Gulfport Energy, reported in an investor presentation that it grew production in the Utica by roughly 50 MMcfe/d from fourth quarter 2015 to first quarter 2016. The company stated that 65% of its Utica reserves are dry gas. Antero Resources has also touted its dry gas acreage in the Utica in both West Virginia and Ohio, and the company says it has over 200 potential dry gas well locations in the Utica. State data shows CNX Energy and Eclipse Resources have significant levels of production in Monroe County, Ohio, where much of the dry gas production has reportedly come from.

PADD 4 and the Midcontinent

Despite weak prices and drilling economics, supplies from core acreage in the Denver Julesberg and SCOOP/STACK plays in the Rockies and Midcontinent have helped to keep these regions from netting propane declines over the past several months. From October 2015 to the most recent EIA data in February 2016, PADD 4 (Rockies) supply of propane has increased 9 Mb/d, and propane supply in the Oklahoma-Kansas-Missouri Refining District has increased 3 Mb/d.

Filling the Gap from February to Today

With unprecedented export volumes and production teetering on decline in several producing areas, understanding trends in propane supply is as important as ever. At PointLogic, we monitor such trends by using natural gas flow data across 92 different producing areas to model estimated NGL production on daily basis. The chart below shows daily propane supply since last February.

Gas Plant Propane Supply

While our daily model shows that propane supplies have had their ups and downs over the past few months, our models shows production is mostly unchanged since February. We do not see consistent movement upward or downward.

Conclusion

The fact that both EIA and PointLogic flow data imply relatively resilient propane supply in a low-price environment is good news for anyone who would not like to see the propane market swing from surplus to shortage in the near future. Whether or not mostly flat supply is enough to keep up with exports is another question as the U.S. finds itself in uncharted territory in now having surplus propane export capacity.

Regardless, the U.S. flexed its propane export muscles this past winter. If export volumes stay on their current track, there’s no question that the propane market will need a stable supply source behind those volumes. That stability is questionable in today’s price environment, and a lack thereof could lead to bullish outcomes for the propane market going forward.

 

« Back to Get the Point main page

 

Sign up here to have Get the Point delivered to you each week!


 
EMAIL
 
FIRST NAME
 
LAST NAME
 
COMPANY

 

 

 

Share With Your Colleagues

 

 

 

 

 


© PointLogic Energy, an OPIS Company | Site Map