The U.S. is exporting record volumes of propane, another way in which the shale boom has made the nation a more dominant force in the global energy trade.
Foreign sales are surging as U.S. producers capitalize on higher prices overseas. That in turn is causing U.S. prices to rise, making Fourth of July barbecues a bit more expensive than cookouts a few months ago.
In a first, U.S. oil-and-gas companies are on track this year to export more propane than the next four largest exporting countries combined — OPEC members Qatar, Saudi Arabia, Algeria and Nigeria, which have long dominated the trade — according to analytics provider IHS Inc. U.S. exports already account for more than a third of the overall market for waterborne shipments, IHS said.
Propane exports hit an all-time high of 884,000 barrels a day in February, according to the U.S. Energy Information Administration. Platts Analytics, an energy data provider, projects that a new record was set in May, for which government data isn’t yet available. The exports have been enabled by a new network of pipelines, shipping terminals and tankers that doubled capacity from a year ago.
“It’s been a major source of investment and one of the big success stories,” said Ron Logan, a partner at energy investing firm Kayne Anderson Capital Advisors LP.
Propane, a natural-gas liquid, is a byproduct of natural-gas drilling and refining crude oil. After the shale boom made propane more plentiful, exports became a widely sought solution because it is much easier to bottle and ship than other fuels. About half of all U.S. exports wind up in Latin America, while the rest goes to northwest Europe and Asian markets. In 2013, the U.S. overtook Qatar as the world’s top propane shipper.
The dominant U.S. position could benefit further from the expansion of the Panama Canal, which in June completed a $5.4 billion upgrade. That project allows the large ships transporting propane to make faster and cheaper trips to big Asian markets like Japan, China and South Korea.
All this is a welcome development for U.S. oil-and-gas drillers stung by a rout in commodity prices that has led to dozens of bankruptcies. The fuel came up from shale in such overwhelming supply that producers sometimes had to pay customers to take it off their hands.
Now, investors are betting prices will continue to climb. Propane producers and shippers are among the top performing stocks this year.
Shares of Range Resources Corp., an exploration and production company that ships propane that it extracts in Pennsylvania, are up 81% year to date. Pipeline and processing companies Oneok Inc. and DCP Midstream Partners LP have gained 93% and 41%, respectively.
The export capabilities are enabling U.S. producers to capitalize on the premium in overseas propane prices versus the domestic price. The sales are easing a domestic propane glut that had been dragging on prices.
Propane recently fetched premiums to U.S. prices of roughly 20% and 29% in Europe and Japan, respectively, according to the Oil Price Information Service.
Domestic prices have been rising, up 78% from a 14-year low of 29.6 cents a gallon hit in January, according to Platts Analytics. Trading at about 53 cents a gallon at the main U.S. trading hub in Mont Belvieu, Texas, propane prices are still on the cheap side of their historical levels. Yet analysts expect prices to rise further as more propane is sold abroad and to new chemical factories starting up on the Gulf Coast.
The rise in wholesale prices hasn’t hit most consumers yet. Retail propane prices averaged about $2.24 a gallon in New York state in May, the most recent data available, down about 10% from the year before, according to the state’s Energy Research and Development Authority.
The rise in prices will likely be felt by the six million mostly rural U.S. households that heat their homes with large tanks of propane.
The higher prices have caused pain for some companies. Dow Chemical Co. built expensive propane-fed factories that were planned with fuel costs at rock-bottom prices. Other chemical makers, including Ascend Performance Materials Operations LLC, have delayed plans for propane-fed plants, due to rising construction costs and higher raw material costs.
“Propane will be increasing in price faster than all the other hydrocarbons,” said Rusty Braziel, a former propane trader who runs consultant RBN Energy. “From the standpoint of chemical companies, it’s not such good news.”
Some analysts warn that pipeline owners and shippers may have already overbuilt and will have to lower the rates they charge to win business.
Tudor, Pickering, Holt & Co. called the expanding export infrastructure business “a little like youth basketball, lots of participation trophies but fewer winners.”
Already daily shipping rates have plummeted to as little as $20,000, down from the $120,000 or so it cost last summer, as dozens of new tankers hit the water, the Houston investment bank said.
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