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U.S. propane shortage provides lessons for debate over oil and gas exports

A technician delivers propane to a home-heating tank in Illinois. Propane is commonly used for heating and cooking in the Midwest and New England.
A technician delivers propane to a home-heating tank in Illinois. Propane is commonly used for heating and cooking in the Midwest and New England.Read moreDANIEL ACKER / Bloomberg News

As the nation charges toward energy independence, many Americans learned an important lesson this winter: Just because the country is awash in domestic fuel doesn't mean it will be there when they need it most.

From December into February, when winter temperatures plummeted to record lows across much of the country, residents in the Midwest and Northeast struggled to stay warm amid propane shortages and price spikes. Propane, also known as autogas or liquefied petroleum gas (LPG), is vital because it heats more than six million homes, fuels equipment and vehicle fleets, and is instrumental on farms for drying grain for storage and keeping livestock-filled barns warm in the winter.

This happened despite several years in a row of soaring domestic propane production—calling into question the commonly held belief that an abundance of American-made energy will automatically provide energy security and lower fuel prices for consumers. The nation's supply of propane—a byproduct of natural gas drilling, oil drilling and oil refining—has been surging alongside the oil and natural gas being pulled from shale formations from North Dakota to Texas and from Ohio to New York.

To avert what was fast becoming a crisis, more than 30 states declared emergencies and loosened certain trucking regulations to ease propane deliveries from the Gulf Coast and elsewhere. Because of exorbitant prices, governments rushed heating-assistance money to consumers and loans to propane distributors caught in a cash crunch. Propane dealers rationed the fuel, and in an unprecedented step, a federal agency ordered a pipeline company to give top priority to propane shipments to the Midwest.

Several factors, some caused by Mother Nature, others by company actions, led to the propane crisis. They included: a huge jump in propane use to dry corn, a separate demand surge to provide heat during a fierce winter freeze, company decisions that curtailed pipeline deliveries of propane, and record-high exports that continued to drain supplies into the peak heating season.

One reason companies proceeded with exports and pipeline changes that left propane consumers vulnerable this winter is that producers of many critical commodities—including oil, natural gas, propane, gasoline, diesel, jet fuel and heating oil—are not obliged to distribute those fuels in a way that benefits U.S. consumers. If it's more profitable for companies to sell those products overseas or reconfigure pipelines, then whenever possible, they will do so.

Those market dynamics are important to keep in mind as the debate heats up in Washington over clearing the way for more natural gas exports and removing the export ban on U.S. oil. There are no limits on exports of propane or refined petroleum products such as gasoline.

"It's really important to understand that the oil and gas industry is really good at doing one thing above all others, which is making money—they actually have a fiduciary duty to their shareholders to maximize their profit," said Stephen Kretzmann, executive director of Oil Change International, a group that advocates shifting away from fossil fuel use. "They have found out, particularly in recent years, that the best way to do that is to minimize inventories, to buy things on the spot market, and to take advantage of the export markets when they can."

Propane's Woes: A Foreshadowing

Industry practices that boost profit at the expense of consumers can already be seen in the nation's gasoline and diesel markets. In the case of those fuels, record levels of exports have helped keep U.S. fuel prices aloft even though there's a glut of discounted crude oil in Texas, where refiners have been churning out products at high rates. Meanwhile, the nation's fuel inventories remain relatively lean, so problems with pipelines or refineries often produce price spikes.

Domestic natural gas, now being produced at a brisk pace, was nonetheless in short supply in the Northeast this winter because of strained pipeline capacity. No one has plans to build more pipeline capacity because it would be unprofitable to do so.  Storage facilities that were once adequate are less so now that there's a nationwide shift to fueling power plants with natural gas.

But the troubles with propane have provided the most dramatic example—and could foreshadow the kinds of ramifications consumers could face if natural gas exports get accelerated or the nation's oil export ban is lifted.

"It was the perfect storm of events that happened that got us here," said Mollie O'Dell, spokeswoman for the National Propane Gas Association (NPGA), the industrys lead advocacy group. "We can point to four things that in any other year, they would have been seen as an anomaly, and this year they all happened at the same time."

The events were:

Record propane exports. Propane production was exceeding the nation's largely seasonal demand for the fuel, which sent producers on the hunt for new customers. They found plenty of them in Central and Latin America, as well as Asia, and that led to expanded export facilities in Texas. In 2013, propane exports rose more than 75 percent to a record 4.6 billion gallons, equal to more than 20 percent of U.S. production, according to the NPGA. Many companies have signed long-term export contracts that carry penalties for cancelled export shipments. Those overseas deliveries, which left the Midwest with unusually low inventories, continued at record levels long after several states had declared emergencies because of low propane supplies.

—A bumper crop of wet corn. Coming off a couple years of below-normal grain production, Midwest farmers grew a record corn crop that got drenched by late rains. That delayed the fall harvest and caused corn-drying to consume nearly six times the amount of propane used in a normal year, according to O'Dell of the propane association.

Sustained frigid weather. The Polar Vortex hit the country after a string of relatively mild winters, causing propane use to jump dramatically everywhere except on the West Coast. The impact was magnified in the Midwest because supplies that were supposed to last the winter had already been severely depleted by the grain drying.

Pipeline company choices. Kinder Morgan Energy Partners took its Cochin pipeline out of service for several weeks starting in late November, cutting off the flow of Canadian propane to the Upper Midwestern at a critical time. That pipeline is being reversed later this year to carry fluids for diluting Canada's thick tar sands oil. The move will boost profits for Kinder Morgan, but also will permanently eliminate pipeline capacity that delivered 50,000 barrels per day of propane, including 40 percent of Minnesota's supplies. The company had said the line would remain in service until March. In addition, Enterprise Products Partners reversed one of its northbound pipelines, a change that forced more products to squeeze onto Enterprise's TE Products pipeline system (TEPPCO), which continued carrying products north from Texas. Propane shippers suddenly had to compete for space on that pipeline against products displaced by the Enterprise reversal. Shifting more deliveries to railcars was tough amid the crush of oil now also traveling by railroad. In early February, the Federal Energy Regulatory Commission ordered Enterprise to temporarily give propane priority on its TE Products pipeline to ease supply shortages in the Midwest and Northeast.

"The industry has pulled together a comprehensive task force to look at the events of this winter and to create a path going forward," said O'Dell of the propane association. "There are some things that government can do. There are some things that customers can do, and there are things that we as an industry can do. Everything is on the table right now."

O'Dell said the industry is looking at the effect exports had on wintertime propane supplies. "There's no question that exports in such significant volumes were a significant factor during the winter of 2013/2014," NPGA President Richard Roldan told lawmakers last week during a congressional hearing on fuel supply and infrastructure. He urged the government to conduct a "rigorous and formal review" of propane export policies.

Several lawmakers are interested in that question, and related ones, too, to avoid a repeat of this winter.

Lawmakers from Vermont and many other states wrote federal officials and the White House seeking temporary restrictions on propane exports. Others introduced legislation to extend emergency exemptions from federal trucking regulations until May 31 unless the heating fuel crisis ends before then.

In late January, Sen. Charles Grassley, R-Iowa, asked the Federal Trade Commission to investigate the winter's large spikes in propane prices to "see whether the price increases are legitimate or manipulated in any way to consumers' detriment."

And some in the propane industry are calling for a government-funded Strategic Propane Reserve, which they believe would help protect consumers against shortages caused by infrastructure issues, aggressive exports and insufficient inventories.

Still, it's unclear how things will unfold next heating season. The shortage of pipelines ferrying propane to the Midwest won't be easy to remedy. What's more, export terminal expansions already underway suggest that the stream of propane headed overseas will continue to grow.

Meanwhile, domestic propane use is poised to start growing again. Last week, UPS announced a plan to spend nearly $70 million on 1,000 propane-powered delivery trucks to its fleet in several Southern states.

Given this winter's debacle, it's an open question: Can the industry deliver?

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