ANALYSIS-Propane Freeze Squeeze May Harden Resistance To U.S. Oil Exports
NEW YORK, Jan 26 (Reuters) - A shortage of propane heating fuel during a brutal U.S. cold snap this month threatens to sharpen the year's most urgent energy policy debate - how much of its newfound shale oil and gas bounty should America export?
Millions felt the pinch last week as another wave of biting, bitter cold strained already low propane supplies in the Midwest, causing prices to surge three-fold over two weeks to record highs and forcing suppliers to ration deliveries.
While the shortage was likely caused by a confluence of events, including extraordinary cold, a temporary pipeline shut-down, and low stocks, some industry observers and at least one politician blamed the spike in part on soaring exports of liquefied petroleum gases (LPGs) such as propane.
Unlike crude oil and natural gas, both of which are now at the center of a national debate over restrictive export rules, LPG and other fuels can be freely shipped abroad.
Ron Wyden, Senate Energy Committee Chairman and an Oregon Democrat who has opposed unlimited exports that could raise consumer prices, believes the propane squeeze is a "concrete example" of the risks that consumers may face, he said via a spokesman. It shows why "the United States needs to take a cautious approach to energy exports".
Iowa Senator Chuck Grassley called on the Federal Trade Commission to review the cause of the price spike to ensure markets weren't being manipulated.
By Friday evening, wholesale prices had begun to subside, offering hope that the shortage may be easing as traders ship cargoes of compressed LPG to the East Coast and truckers divert more supplies from the Gulf Coast refining hub.
Still, the scare may fuel more resistance to easing export constraints of any type of energy, and shows how the unexpected eruption of U.S. shale oil and gas is also creating temporary pockets of scarcity, as energy companies adjust their supply chains and transport networks to a new era of abundance.
Propane production has grown across the country from shale wells that typically produce LPGs alongside oil and gas, rising 27 percent over the past five years to 1.4 million barrels per day (bpd), Energy Information Administration data shows.
As output rose, prices slumped to well below global rates, because producers lacked the specialized, pressurized facilities to ship propane abroad. By mid-2012, benchmark prices in Conway, Kansas, fell to 50 cents a gallon.
But with a profitable price gap, companies including Enterprise Product Partners and Phillips 66 invested millions in export facilities, and shipments have swelled. After rising to 170,000 bpd on average in 2012, exports reached 300,000 bpd last May and topped 400,000 bpd for the first time in October, EIA data show.
Politicians and energy analysts explain the shortage as the culmination of several unusual factors - a record-breaking freeze at the start of January came just as propane inventories were abnormally low due to a bumper corn harvest last fall, which used up propane for drying out the crop.
A pipeline outage during most of December exacerbated the situation.
Nonetheless, opponents of energy exports believe there is more to the coincidence of an export boom with a price spike.
"I know some want to characterize the situation as the perfect storm," said Brandon Scholz, managing director of the Wisconsin Propane Gas Association. "But we believe that less and less. ... The high level of exports came at a time when they contributed to a significant fall in propane inventories."
Propane is not the only market to experience sudden shortages this winter. Northeast and New York natural gas prices have surged 10-fold in recent weeks due to a lack of new pipelines to meet growing peak-winter demand.
The situation with natural gas and oil is not the same as LPG.
The United States imposed a ban on crude oil exports during the 1970s Arab Oil Embargo and it became the backbone of U.S. energy security policy. Decades later, as oil production soared thanks to the fracking-led shale revolution, some in the industry have said the time has come to lift the curbs.
Natural gas exports to non-Free Trade Agreement countries was essentially barred under separate laws, although the Obama Administration has begun approving a handful of the near two-dozen requests to ship liquefied natural gas (LNG) abroad.
Few expect a knee-jerk ban on LPG exports, as some would like. But the arguments presented by some propane associations, tinted as they are with energy security concerns, may be hard for lawmakers to contend with during an election year.
"The notion of energy independence that everyone bought into with the shale revolution apparently doesn't mean anything," said Steve Ahrens, executive director of the Missouri Propane Gas Association. "If the price moves (propane) somewhere else, it is not available to us," Ahrens said.
Ahrens and Scholz said they would be talking to their congressmen about the shortage, urging them to act.
Eventually, as in most open commodity markets, prices should subside as more fuel is rushed inland. Gulf Coast propane prices rose this week by barely 20 cents, and at $1.50 per gallon offer a lucrative arbitrage to the Midwest. Many states have eased rules on propane trucks to speed deliveries.
But even then, the political implications may linger.
"This is definitely an issue that will come to the surface as the fallout (of the shortage) becomes more well known," said John Kilduff, partner at Again Capital LLC, a hedge fund. "The industry has been caught short, a lot of consumers are going to ask the question - why are we allowing this?"