Propane Council Distributes Summary of Propane Market Dynamics and Industry Infrastructure Study to Propane Industry

[October 13, 2000]

BACKGROUND. In recent years retail propane marketers have reported logistical problems and temporary regional supply outages during peak demand periods despite warmer-than-normal winter weather. To better assess the situation, the Board of Directors of the National Propane Gas Association (NPGA) asked the Propane Education & Research Council (Council) to fund a study of propane market dynamics and industry infrastructure. The Council approved funding and hired Purvin & Gertz, Inc. (P&G) to perform the study. Its conclusions and recommendations, reported on October 2, 2000, are summarized here.
Purvin & Gertz used numerous sources of information to conduct the analysis of the U.S. propane marketplace. A key element of the study was a questionnaire mailed to 190 retail propane marketers in America. Sixty-three firms responded, representing 27.5% of total retail propane sales and all 50 states.

The full report contains proprietary data of Purvin & Gertz that cannot be publicly circulated. The report is not available from the Council. This summary is provided for informational purposes.

SUPPLY AND DEMAND. Purvin & Gertz believes that 'overall propane supplies are adequate to meet the needs of the existing domestic retail propane market and to support additional growth in that market.' However, the firm concluded that 'the temporary supply outages and distribution delays encountered by many dealers over the past three years reflect a growing trend that could lead to far more serious outages and even higher price spikes should severe winter weather conditions develop this coming winter.'

Purvin & Gertz explained that 'no single solely responsible for the distribution problems our retail industry has experienced in recent years. Instead, the supply outages and long waiting lines at major terminals during peak periods is the net result of numerous market fundamentals and forces coming together and working against the marketplace and marketers at the same time.'

One key factor P&G determined is the 'real growth' that has taken place in the retail propane industry in recent years, concluding that 'growth has been hidden in the total demand data by warmer-than-normal weather incurred during 5 of the past 6 winters.' P&G estimated average retail market growth of 5.4% over the past six winters, and 4.9% annually over the past four years. This indicates that despite warm weather conditions, consumption per consumer has risen dramatically for several years.

OUTAGES. Many propane marketers attributed peak period supply outages and delays mostly to insufficient common carrier infrastructure that has not expanded to accommodate the needs of a growing industry.

Purvin & Gertz 'confirmed that several propane supply channels and distribution systems are not capable of handling peak demand levels for extended periods of times. This is the case particularly in regions dependent on pipeline supplies where pipeline throughput demonstrates extreme seasonality changes similar to the demand profile for the retail industry.'

Most outages and delays have been reported at pipeline terminals, according to P&G, which analyzed recent throughput on the TEPPCO and Dixie systems over the past few years. P&G said that these propane pipelines basically operate under the same 2:1 winter- to-summer ratio of the typical retail propane marketer. P&G concluded that 'current-day industry economics do not support building additional pipelines alongside existing lines when the current systems are not being utilized efficiently.' TEPPCO and Dixie systems have undergone several de-bottlenecking projects in recent years but ''just-in-time' inventory practices of the retail industry have not led to reliable and sustained increases in pipeline utilization.'


MARKETERS. Purvin & Gertz offered the following recommendations for propane marketers dependent on pipeline supplies:

Encourage state or national associations to form a Winter Fuels Task Force to meet with pipeline officials and develop a list of parameters and guidelines for dealers to follow to lessen the likelihood of future delays and outages.

If your pipeline system rewards those who move greater levels of summertime volumes or have leased storage on the system, reconsider your current business model and look for ways to alter it to increase your probability of meeting the minimum standards for obtaining greater supply levels during peak times.

Carefully review bulk storage and rolling stock capacities and make plans to increase storage to handle 14 days of peak daily demand (sales) rates, which is typically sufficient to survive most supply disruptions caused by weather.
PIPELINES. Purvin & Gertz also made recommendations for pipeline companies:

If economically justified, add propane storage capacity and install additional truck loading spots at pipeline terminals that have exhibited a history of spot outages and/or long waiting lines.

Ensure that guidelines for shippers and lifters on the system are communicated in writing to all companies expected to use the system.

Provide suggestions and guidelines for prospective shippers and lifters to follow (during both peak demand periods and the remainder of the year) that will minimize future outages and loading delays if followed or practiced regularly.

Implement a scheduling system for receiving and loading trucks during peak winter periods for each of your terminals in order to decrease waiting and loading times for all drivers.
REFINERIES. Noting that a significant number of refineries do not load propane 24 hours per day, even during peak winter weather conditions, Purvin & Gertz recommended that:

NPGA send a letter to all refinery managers in the U.S. and request consideration for around-the-clock loading hours 7 days per week during the peak winter months.
TRUCKING. Purvin & Gertz concluded that 'too many dealers rely on common carriers or suppliers to handle their incoming truck supply needs.' P&G recommended that marketers reconsider their investment in trucks and transports, noting that companies operating without their own transports or with few transports in relation to the number of bobtails were likely to experience supply disruptions more often.

RAILCARS. Despite speculation that the railcar fleet was shrinking, Purvin & Gertz found that the railcar fleet is growing at about 1.0% per year, with the national population of LPG railcars at about 15,500. It said that 'the greatest problem with railcar availability is more an issue of railroad service than it is equipment inventories.'

P&G attributed recent declines in availability to rail deregulation and consolidation, and to railcar retrofit programs that took cars out of the fleet temporarily. A new retrofit program lies ahead for cars made in the early 1960's, P&G reported. The firm noted a trend among larger propane marketers to drop some railcars from their fleets and to lease cars for shorter periods, a trend that could have an impact on service.

INVENTORY MANAGEMENT. Purvin & Gertz concluded that the retail dealer industry has 'an overall shortage of bulk plant inventory capacities' and relies too heavily on "just-in-time" inventory practices. However, the analysis concluded that dealers have already begun to increase their bulk plant storage capacities, noting that among survey respondents, annual stationary storage capacities grew 6.3% per year over the past five years with growth rates of 5.07%, 5.12%, 3.72% and 11.42% for the years 1996, 1997, 1998 and 1999.

Total bulk plant or stationary storage owned by dealers 'equated to only 3.85% of annual sales by the respondents and represented an inventory turnover of 26.0 times per year,' P&G reported.

STORAGE CAPACITIES. P&G estimated that for 1999 total dealer or secondary storage stood at 9,154,742 barrels, while tertiary storage (storage owned or leased by the propane consuming public) is far larger at 111,251,296 barrels. Combined secondary and tertiary storage totals 120.4 million barrels. This, combined with an additional 131.6 million barrels of underground propane storage and 5.4 million barrels of identifiable large aboveground propane storage, totals 257.4 million barrels of readily identifiable propane storage.

'Thus, total storage, including tertiary, equates to 108% of annual propane sales by all retail marketers, or 13 months of retail sales. One cannot make a case that our nation has a shortage of total propane storage capacities. However, when one considers that total secondary storage is only 9.15 million barrels, or 3.6% of total storage and 3.85% of annual retail sales, a huge bottleneck is evident,' P&G said.

The P&G survey showed that only a few marketers lease storage from third parties, with total gallons leased storage reported at 68.6 million gallons, or about 2.5% of all sales gallons reported by the respondents. 'We feel that one significant reason this trend is occurring is the greater reliance on financial instruments to handle the purchase and delivery of future supplies,' P&G said.

HEDGING AND RISK MANAGEMENT. Of the 63 responses received on the P&G dealer surveys, 50.8% of the dealers responding do not hedge or use financial instruments to limit volatility or control their cost of product. P&G observed that 'this was largely a 'big dealer-small dealer issue,' as most of the larger marketers practiced some form of hedging or risk management at times, while most small dealers cited a lack of knowledge or lack of expertise as being the principal reason for not hedging product purchases.

NOTE: The findings, conclusions and recommendations highlighted herein are those of Purvin & Gertz, Inc., and not those of the Propane Education & Research Council.