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Salt of the Earth
November 1, 2009 By: Patrick Hyland LPGasLast year’s brutal supply shortages cost many Northeast propane marketers their shot at cashing in on one of the most profitable winter heating seasons on record.
A historic 70 percent drop in wholesale prices launched retail margins skyward as below-normal winter temperatures set in for two-thirds of the nation including all Northeastern states.
But inadequate early season allocation and weather-related shutdowns along the TEPPCO pipeline had rigs parked 80-90 deep to pull rationed loads. Area marketers had to scramble – and pay a premium – for product trucked in from Ohio, Indiana, Illinois, Michigan and North Carolina. Meanwhile, no spot waterborne supplies were available and spot rail supply costs hit record premiums.
Company officials at Inergy L.P. believe their ongoing investment in propane and natural gas storage facilities around the Finger Lakes region of New York will soon offer a solution to the region’s historic susceptibility to supply shortages.
Inergy, the nation’s fifth largest propane marketer, is a diverse retail and midstream energy business. The master limited partnership sells about 350 million gallons of propane under a number of regional brand names to 700,000 retail customers in 28 states – primarily in the eastern half of the nation. It also sells a similar volume through its wholesale supply and distribution services to independent propane operators in the United States and Canada.
The Kansas City-based company owns and operates natural gas liquids fractionation, storage and terminal facilities on the West Coast plus 40 billion cubic feet of natural gas storage at three New York sites. With a potential for 53 billion cubic feet of working gas storage capacity and 7 million barrels of natural gas liquids storage within 200 miles of New York City, Inergy is becoming one of the largest independent natural gas and NGL storage operators in the Northeast.
The company has been adding natural gas midstream assets in the New York region since 2005 as part of its plan to operate an integrated gas storage and transportation hub.
“We want to be the company that ties all the infrastructure together for that region,” explains Bill Moler, senior vice president for Inergy’s wholly owned subsidiary, Inergy Midstream LLC.
“Our procurement and distribution capabilities already help distinguish us in the market. The wholesale side of the business provides valuable market intelligence, and many wholesale customers also use our transportation services. Plus, our supply group helps us maintain a secure source of propane with product cost advantages for our customers.”
In August 2008 Inergy bought U.S. Salt LLC, a salt production and processing company in Watkins Glen, N.Y. U.S. Salt sells 300,000 tons of food, pharmaceutical and chemical feedstock-grade salt each year. The company’s 135 employees make it the largest employer in Schuyler County, where it has operated since the 1890s.
It seemed an odd portfolio addition even for a diverse MLP like Inergy.
“Yeah, it was hard for us to connect the dots for the investment community,” acknowledged Bill Gautreaux, president of Inergy Services – a division of Inergy Propane that oversees the supply and risk management group and wholesale marketing team.
“But in hindsight they realize that the business really is a great MLP asset because of its stable pricing and growing volume.”
The solution-mining process at the 620-acre salt plant on the southern shore of Seneca Lake creates key natural gas and NGL storage opportunities. Inergy is investing $40-50 million to develop and upgrade the caverns, which TEPPCO leased for storage years ago. The caverns were capped for almost 50 years and must be tested for structural integrity.
The company has been developing 5 million barrels of LPG storage at the U.S. Salt site over the last year. The site will be supported by rail and truck terminal facilities and is designed to be connected to the TEPPCO Pipeline. Located just 25 miles east of the company’s 1.5 million barrel salt cavern propane storage facility in Bath, N.Y., Inergy expects its Finger Lakes LPG storage expansion to be completed by spring 2010.
Moler noted that the U.S. Salt facilities also add strategically important assets that complement Inergy’s growing midstream natural gas storage platform for the challenged Northeast market. Located between its Stagecoach, Thomas Corners and Steuben County natural gas storage facilities near the New York-Pennsylvania border, it will provide 5 billion cubic feet of working natural gas storage by next fall. An additional 5 billion cubic feet of future capacity also can be tied in to Inergy’s existing distribution network, Moler says.
Equally important, the new facilities promise to capitalize on new drillings under way in the promising Marcellus Shale natural gas field that extends 575 miles across Pennsylvania, New York, Ohio and West Virginia. Several hundred wells have been drilled into the field, which is said to be high in propane and butane content.
“We already have seen lots of gas plants springing up in the region because of that drilling. Where is all that product going to go? We really want to be the solution for that question,” Gautreaux says.
“Our goal is going to be to keep those processors dry, giving them a place to store their summer supplies until winter demand offers them a premium price.”
The new Finger Lakes storage could service propane produced from the Marcellus Shale gas as well as Western Canadian. Because storage in eastern Canada is limited, Inergy hopes its new facilities will serve as a staging area and distribution point for propane marketers in the Northeastern states. That should add supply reliability and price stability for the region, company officials say.
“The big players typically rely heavily on railcar shipments, which are often constrained. This project extends eastern Canada storage as a staging area for Northeast demand and offers increased efficiencies in distribution and responsiveness,” Gautreaux says.
Inergy has already received demand requests for 2 million barrels and is finalizing firm commitments on the remaining volume, he added.
“There is a growing base of demand for propane throughout the Northeast, especially now with the decline of heating oil. But a lot of things must work well right now to balance supply and demand up here,” Gautreaux says.
“If these facilities had been around in the winter of 2008-09 we just might have avoided those shortages.”