Propane production up, but U.S. shortage looms

Shale gas producers across the country are pulling so much propane out of natural gas wells, they have quadrupled exports in the last three years. By the end of 2014, Sunoco Logistics Partners will have the capacity to load a million gallons a day of Marcellus Shale propane onto ships at its Marcus Hook terminal south of Philadelphia.

But this winter's weird weather, and a bumper crop of Midwestern corn that required four times more propane for drying, has triggered an unprecedented domestic shortage of the fuel, a byproduct of natural gas production and crude oil refining.

Prices have soared, and inventories are at record lows.

"Homeowners are freezing their asses off and complaining because people are making all this dough exporting the stuff," said Scott Gray, senior director for IHS Waterborne Energy, a Houston market-research firm.

Elected officials in propane-dependent states are demanding relief. On Feb. 14, the congressional delegation from Vermont, where 15 percent of households heat with propane, called on the U.S. Commerce Department to impose a temporary export ban.

"The problem is that almost all new propane production over the past three years has been exported to more lucrative overseas markets instead of being used to meet consumer demand right here in the United States," said the letter from Sens. Bernie Sanders and Patrick Leahy and Rep. Peter Welch.

"The irony is that Europe is having a warm winter and they don't need it," said Mark Delehanty, president of the Pennsylvania Propane Gas Association and owner of Independence Propane in Green Lane, Montgomery County.

Propane is commonly used for heating and cooking in the upper Midwest and New England. In this region, where it is more commonly associated with use as a fuel for outdoor grills, about 4 percent of Pennsylvania households - 189,000 - use propane for home heating, according to the U.S. Energy Information Administration.

In New Jersey, 61,000 homes, or 2 percent, heat with the fuel, also known as bottled gas or liquefied petroleum gas (LPG).

In recent years, domestic demand for propane has been in decline. Industry officials, who are not eager for government intervention, say the export market is not solely to blame for current shortages, which were caused by high agricultural demand, pipeline constraints, and the severe winter.

"This has never happened in the 100-year history of propane," said Mollie O'Dell, a spokeswoman for the National Propane Gas Association. "It's been a perfect storm of events."

The debate over propane exports is kind of a dress rehearsal for a larger discussion about whether the United States should lift a four-decade ban on crude oil exports or relax restrictions on exporting natural gas.

Supporters of trade barriers argue that allowing exports hurts domestic consumers, and producers say exports improve the balance of trade and generate more domestic jobs producing the fuel.

Industry leaders say there are signs that market forces have responded in recent weeks to the domestic propane shortage.

Exports dropped dramatically in February, said Gray, whose Waterborne firm tracks individual shipments of propane. He said 1.75 million gallons of propane from the Netherlands was on tankers heading toward New England because pockets of the United States had become a buyer's market.

"That's more propane than was imported all of last year," he said.

AmeriGas Partners L.P., the Valley Forge company that is the nation's largest propane distributor, said it had captured some fuel destined for export.

"We have been able to call in a number of favors this winter where we've gotten barge shipments," Jerry E. Sheridan, chief executive of AmeriGas, told analysts this month. "We've bought entire ships that were export-bound."

Sunoco Logistics, which plans to begin shipping 25,000 barrels of Marcellus Shale propane a day to Marcus Hook on a reconfigured pipeline it calls Mariner East, began receiving propane for export by train and truck last year at the Delaware River facility.

Michael J. Hennigan, Sunoco Logistics' CEO, told investment analysts Thursday that he believed the export market for natural gas liquids would stay strong in the long run but that sometimes the best market was local.

"The Marcus Hook facility gives you the optionality to keep the barrels in this market, which is where it's the best value today," he said.