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2016 Propane Market Outlook: Driving Change in Consumer Propane Markets
NPGA Southeastern Convention & International Propane Expo
April 8, 2016
Presented by:
Michael Sloan ICF International 9300 Lee Hwy Fairfax, VA 22031
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2016 Propane Market Outlook: Driving Change in Consumer Propane Markets
April 2016By:
Michael SloanPrincipal
ICF International9300 Lee Highway
Fairfax Virginia22031
Disclaimer: This presentation presents the views of ICF International. The presentation includes forward-looking statements and projections. ICF has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual market results to differ materially from the projections, anticipated results or other expectations expressed in this presentation.
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1. General energy market conditions
2. Propane supply outlook
3. Opportunities and risks in domestic propane markets
Today’s Topics
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1) General market conditions plus lower propane prices create opportunity for a rebound in traditional propane markets
– Targeted consumer education and marketing is critical
2) The largest growth opportunities are in internal combustion engines
– However, lower gasoline and diesel prices mean the propane industry will have to work harder to develop these markets
3) The propane supply balance is shifting again:
– From an over supplied market with propane resource prices below sustainable levels
– To potentially tight supplies and volatile prices – As early as this fall
– depending on international demand, and short term propane production trends
Critical Messages for the Propane Industry
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Propane & Crude Prices
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Pro
pan
e/W
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ts/G
al
Mont Belvieu Propane WTI Crude Oil Propane/WTI Ratio
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Propane, Gasoline, & Diesel Spot Prices
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30Ja
n-1
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-12
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-12
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$/M
Mb
tu
Mont Belvieu Propane NY Harbor Gasoline
NY Harbor ULS Diesel
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Observations on Low Energy Prices
According to the American inventor Thomas Edison:
“Invention is 10% inspiration and 90% perspiration”
But in today’s energy price environment:
“Innovation is 10% inspiration and 90% desperation”
And the 10% inspiration is also driven by desperation.
Low oil, natural gas, and NGL prices are
accelerating the rate of innovation in oil and gas
supply and creating a long term cycle of lower
prices.
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ICF Crude Oil Price Outlook
• ICF’s expects a slow rebound in WTI oil prices
– Reaching $75 per barrel by 2025.
• However, expect oil prices to fluctuate widely
• ICF does not anticipate a sustained rebound above $100/bbl
– a sustained rebound above $80/bbl is unlikely.
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USD
/bb
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WTI Crude Oil Price
Low Historical Futures Base
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Propane Supply Balance
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Propane inventories reached historically high levels last summer
However, withdrawals are also at record levels
And new demand and export capacity is on its way
How will propane markets balance in the future?
Propane Markets are Transitioning Back into a Period of Tight Supply
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
0
20,000
40,000
60,000
80,000
100,000
120,000
Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16
Pro
pan
e In
ven
tory
Wit
hd
raw
s/In
ject
ion
s
U.S
. Pro
pan
e In
ven
tori
es
Propane Storage Inventories
Propane Withdraws/Injections
Propane Withdraws/Injections
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Propane Supply Outlook
Source: ICF
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Historical and Projected Propane Production
by Production Basin
• Propane production is expected to grow at 3% per year between 2015 and 2030
• Growth is dependent primarily on natural gas production
• Production may stabilize in the short term
• Oil prices will have relatively limited long term impacts
-
500
1,000
1,500
2,000
2,500
3,000
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Tho
usa
nd
Bar
rels
pe
r D
ay
North American Propane Production Outlook
Refinery Production Other Marcellus/Utica
Western Canada Eagle Ford Permian
Bakken Anadarko
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U.S. Petrochemical Propane Demand
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2,000
4,000
6,000
8,000
10,000
12,000
14,000
(Mill
ion
Gal
lon
s)
Company
Output Volume
(tons/yr)
Propane Consumption
(gal/yr) Location Start-up
Year
Existing Plants
PetroLogistics 640,000 459,900,000 Texas 2010
Dow Chemical 750,000 536,550,000 Texas Q4 2015
Plants Under Construction
Enterprise 750,000 536,550,000 Texas Q1 2017
Formosa
Plastics 680,388 475,230,000 Texas Q4 2017
Plants Under Consideration
Williams 500,000 352,590,000 Alberta 2018
Ascend 1,173,000 842,910,469 Texas 2019
Sunoco PA
Dow Chemical
Petrochemical demand expected to grow by about 90 Mbbl/day by 2018:– 2016: 26 Mbbl/d– 2017: 34 Mbbl/d – 2018: 31 Mbbl/d
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Growing Maritime Export Capacity
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LPG Available for Exports
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200
400
600
800
1000
1200
1400
1600
1800
Jan
-11
May
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Sep
-11
Jan
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May
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Sep
-12
Jan
-13
May
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Jan
-14
May
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Sep
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Jan
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-16
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Jan
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Jan
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May
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Sep
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Mb
bl/
Day
Potential LPG (Propanes/Butanes) Exports
Propane/Propylene Butane/Butylene Exports LPG Export Capacity
Total LPG Export Capacity
FORECAST
Propane and Butane available for export at projected levels of
consumer and petrochemical demand
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0
20,000
40,000
60,000
80,000
100,000Ja
n
Feb
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec
Pro
pan
e In
ven
tori
es (
mb
bl)
5-Year Range Min
Max Min
2015 2016
Propane Inventories Outlook
Projected 2016 Inventories if Export Capacity Utilization is Maintained at Current Levels
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As of November 2015, propane inventories were the highest level on record
– 106 Million Barrels
The addition of new export capacity and PDH Plants in late 2015 have resulted in historic inventory drawdown rates.
At current export rates, propane inventories could drop below the 5-year minimum level by the end of 2016
Tighter supply will lead to increased price and market volatility, and unexpected changes in demand could lead to major market disruptions
Exports and petrochemical demand will serve as the incremental market.
Transitioning from an Over Supplied Market to a Balanced/Tight Market
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Propane prices will equilibrate with international markets
– Short term increase in propane prices
U.S. propane prices will be set by International price minusthe incremental transportation costs to market.
– U.S. prices will fall relative to oil as exports must go further to find markets
Propane marketers may need to bid higher prices to keep inventories at home.
Impacts on Propane Markets
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USD
/BB
L
Cen
ts/G
allo
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Mont Belvieu Propane Price
Base Low Historical
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Consumer Propane Demand Outlook
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2015 Propane Market Outlook – Demand
Overview Residential housing markets are improving
– Improving market share in new construction
– Growth in new construction markets
– More competitive market
– Continuing conversion of fuel oil customers
Overall, the number of propane customers is expected to increase. However, total
residential sales are expected to continue a slow decline
– Long term efficiency trends will continue to reduce use per customer
– And residential market growth is high regional
Commercial markets are expected to remain relatively stable
– Improvements in efficiency offset increased utilization of propane resulting from
– Economic growth
– Fuel oil conversions
Residential and commercial markets will continue to face significant threats from
electricity and natural gas
– Continuing loss of market share to electricity in warmer regions of the country
– Continuing improvements in electricity technologies
– Threat from natural gas conversions
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U.S. Average Annual Residential Prices
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Change in Propane Market Share between
2010-2014
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Fuel with Largest Market Share Gain where
Propane Declined between 2010 & 2014
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Fuel with Largest Market Share Loss where
Propane Increased between 2010 & 2014
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Propane Space Heating Market Share in New
Residential Construction Increased in 2014
National Average
• 7.1% in 2007
• 5.2% in 2012
• 5.8% in 2013
• 6.0% in 2014
High market share
propane markets (Lot
size above ½ acre)
• 67% of new propane residential construction
• 18.0% in 2007
• 14.0% in 2012
• 15.3% in 2013
• 15.3% in 2014
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2014 Propane-Heated Housing Starts and
Market Share
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Residential New Construction Market Trends by Region
In 2014 propane new construction market share increased in 5 regions, and decreased in 4 regions
– Declines occurred in the regions most impacted by supply and price concerns (East Coast, West North Central)
– Increases occurred largely in regions where fuel oil and natural gas market share declined
RegionNew
England
Middle
Atlantic
East North
Central
West
North
Central
South
Atlantic
East
South
Central
West
South
Central
Mountain Pacific U.S.
2014 MarketShare
48.2% 9.5% 15.8% 4.0% 4.8% 1.5% 1.4% 2.7% 3.9% 6.0%
2013 Market Share
49.9% 10.6% 12.9% 4.9% 5.2% 0.7% 1.2% 1.2% 2.9% 5.8%
Net Change from 2013 -1.7% -1.2% 2.9% -0.9% -0.4% 0.8% 0.2% 1.6% 1.0% 0.2%
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Significant Growth in Propane Heated
Households in New Construction
Residential new
construction market is
expected grow
aggressively
Recent decline in
propane prices relative
to electricity and natural
gas is expected to lead
to growth in propane
market share
The propane new
construction market is
expected to increase
substantially through
2017
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Estimated Fuel Oil Space Heating Conversions to
Propane
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5,000
10,000
15,000
20,000
25,000
30,000
35,000
Fue
l Oil
Co
nve
rsio
ns
Propane captures 10-15%
of the fuel oil conversions
• Most fuel oil conversion are going to natural gas
Conversions will vary from
year-to-year:
• Comparative fuel prices
• Economic conditions
• Perception of the propane industry
The conversion market
declines slowly as overall
number of fuel oil
households available to
convert declines
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Outlook for New Propane Households
For the past several
years, fuel oil
conversions have
accounted for a major
share of new propane
households
Propane new
construction is
expected to continue to
grow while fuel oil
conversions remain
stable or decline
Conversions away
from propane decline
due to lower prices
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Propane Space Heating Households
Propane site-built space heated
households increased from
2012-2014
• 5.54 million in 2012
• 5.56 million in 2013
• 5.57 million in 2014
And are projected to increase to
5.90 million by 2025
• Growth primarily in New England and Mid-Atlantic regions
Manufactured housing is
expected to continue to decline
for the foreseeable future
• 976,000 in 2012
• 958,000 in 2014
• Projected to decrease to 706,000 by 2025
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Residential Construction Activity is not
Distributed Evenly Across the Country
Counties with Higher than Average Construction Activity
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Counties in Propane Country with Higher than
Average Construction Activity
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Change Per Year in Propane Site-Built Space Heated
Households
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2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pennsylvania
(4,000)
(3,000)
(2,000)
(1,000)
-
1,000
2,000
3,000
4,000
5,000
6,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Minnesota
(7,000)
(6,000)
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Tennessee
(120,000)
(100,000)
(80,000)
(60,000)
(40,000)
(20,000)
-
20,000
40,000
60,000
80,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
U.S.
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Propane Use Efficiency Trends by Region
Propane use per
customer is expected
to continue to decline
for the foreseeable
future:
• Appliance efficiency standards
• Building efficiency standards and building codes
13 percent decline in
space heating use
per household
between 2014 and
2025
Across all regions
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2015 Propane Market Outlook – Engine Fuel
Demand Overview
Most engine fuel markets should see accelerating growth as the new products
become more widely accepted by the market
– On-road vehicles
– Mowers
Forklift markets will continue to face challenges from electric lift trucks and
changes in commercial markets
– There is an opportunity for a new generation of forklifts to grow demand
– Lower propane prices improve competitive position
Agricultural markets should see solid growth supported by agricultural engine
applications
– Irrigation engines
– Space heating
– Grain drying load likely to decline due to continuing improvements in efficiency as
well as low commodity prices
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Alternative Vehicle Fuel Prices at Private Refueling Stations (Reported by DOE)
DOE prices likely overstate actual private fleet fuel prices
Propane vehicle economics driven by:
– Fuel Prices
– Capital Costs
– Alt Fuel Tax Credit,
– Environmental compliance costs (diesel)
– Non-economic factors
Effective marketing and consumer education more important than ever in this market
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al o
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rop
ane
Equ
ival
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$/M
Mb
tu
Gasoline Diesel Natural Gas Propane
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Propane Vehicle Sales
• In 2015, roughly 12,800 on-road propane vehicles were sold
• ICF forecasts new propane vehicle sales to continue rising year over year to 28,000 by 2020 and 50,000 by 2025
– 60 percent of new propane vehicle sales will be Medium Duty Vehicles
– Light duty vehicles primarily conversions
• Propane marketers own about 55,000 vehicles that could be converted to propane
0
10,000
20,000
30,000
40,000
50,000
60,000
Un
its
Total Propane On-Raod Vehicle Sales
FORECAST
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Propane Engine Fuel Consumption
• In 2014, 660 million gallons of propane was consumed by internal combustion engines
– Primarily in the forklift market
• Propane consumption from this sector is expected to rise steadily to over 1 billion gallons by 2020, and 1.6 billion gallons by 2025
• Converting all propane industry vehicles would add 200 million gallons
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Consumer Propane Demand
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1) General market conditions plus lower propane prices create opportunity for a rebound in traditional propane markets
– Targeted consumer education and marketing is critical
2) The largest growth opportunities are in internal combustion engines
– However, lower gasoline and diesel prices mean the propane industry will have to work harder to develop these markets.
3) The propane supply balance is shifting again
– From an over supplied market with prices below sustainable levels,
– To potentially tight supplies and volatile prices – This Winter
Critical Messages for the Propane Industry (One More Time)
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Much of the information in this presentation is available in the PERC report “2016 Propane Market Outlook”
Available on the PERC Website at:
http://www.propanemarc.com/ProductDetails.asp?ProductCode=9507-CS-15
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Michael Sloan
ICF International 9300 Lee Hwy
Fairfax, VA 22031
703-218-2758 (o)
703-403-7569 (m)
THANK YOU!