By The logo may be obtained from 20th Century Studios (The Walt Disney Company)., Fair use, https://en.wikipedia.org/w/index.php?curid=31897195
Propane, also referred to as L.P. gas or LPG at your local hardware store or home retailer, is a non-toxic, colorless, odorless gas that is part of the group of hydrocarbons that are more commonly known as natural gas liquids (NGLs). Most people are familiar with propane as a fuel for summer barbecues, fall tailgate parties, or the popular animated sitcom King of the Hill. However, many may not realize that propane is actually a clean and versatile fossil fuel that is a natural by-product of U.S. gas and oil production. In fact, after methane (CH4) and ethane (C2H6), propane (C3H8) is the third largest component of raw natural gas. Propane is typically separated from the raw production stream of natural gas wells using a combination of refrigeration and pressure, or it is removed as a by-product of the refining of crude oil. Contrary to popular belief, however, propane is extracted from natural gas and crude oil rather than made from it. Whichever production method is used, once propane gas is separated, it is then pressurized and stored as a liquid, often in the ubiquitous white propane cylinders most consumers are familiar with.
The history of propane as a fuel source is equally fascinating. Discovered by the noted French chemist Marcellin Berthelot in 1857, it wasn’t until over 50 years later, in 1910, that its energy-producing properties were better understood. By 1912, however, U.S. commercial propane production had begun, and because of its characteristics as a reliable and easily transportable fuel source, it was given the nickname “bottled gas” as it was commonly stored in steel cylinders. Over the years, as production has increased, propane has also developed into an essential feedstock for propylene-based plastics. Some of the more common propane derivatives include plastic films, fibers, containers, packaging, and even bottle caps. In fact, as its application for industrial uses has expanded, propane has become the second most important base feedstock for the petrochemical industry after ethylene.
Today, propane’s use has expanded to include a variety of residential, commercial, and industrial applications. Its residential and commercial uses are primarily as a heating and cooking fuel, but this has expanded to propane’s use as a refrigerant. Propane’s ease of portability, high energy density, and the fact that it doesn’t degrade over time like diesel or gasoline also makes it an ideal choice for other applications, such as backup power generation, temporary power during outages, or as a primary power source in remote locations. In addition, propane is a clean-burning fuel that does not impact air quality and contributes less to climate change than the combustion of other hydrocarbons. Because of this, the industrial demand for propane, beyond heating and refrigeration, includes its use as a clean and reliable transportation fuel, an emissions-free power source for forklifts, for drying grains such as corn, and as an intermediate for chemicals, pharmaceuticals, food additives, and plastics.
For U.S. consumers, one of the many benefits of propane is that it is nearly all supplied by domestic production. In fact, of the 2.3 million barrels per day (bpd) of U.S. propane supply (2022), only about 5% came from imports – mostly from our North American neighbor, Canada. Of the remaining 2.2 million bpd of U.S. production, about 82% was the by-product of natural gas processing, with the rest coming from the oil refining process. However, thanks to a revival in U.S. oil and natural gas development, propane remains a relative bargain for U.S. consumers compared with other fuels. This greater supply has also allowed the U.S. to become one of the world’s major propane exporters. In fact, in 2022, the U.S. exported over 60% of its domestic production, or about 1.4 million bpd (see chart below). Over one-half of those exports were to Southeast Asia, with Japan being the largest single importer of U.S. propane.
This growing U.S. export story underlies the fact that global demand for propane is steadily increasing. In 2022, the global demand for propane reached 174.3 million tons, which is roughly equal to 5.5 million barrels per day. As the availability of propane in the global energy markets has increased, more consumers and businesses are seeing its benefits as both an important chemical feedstock and a clean and reliable fuel for cooking and heating. Therefore, because of this strong global demand outlook, we expect the export market for U.S. propane production will grow for the foreseeable future.
One of the few disadvantages of propane is that as a by-product of the natural gas and oil refining process, the amount produced cannot be adjusted easily. In fact, the only practical way of reducing propane production is through a process called rejection – a technical term to describe when some of the propane volume is left intentionally in the production stream. While rejecting is more common in ethane production, it is usually impractical to reject propane on a large-scale basis because of its physical and chemical properties. The fact that propane transforms from a gas back into a liquid at a much lower relative pressure than either methane (CH4) or ethane (C2H6) means that propane gas could condense back into its liquid form under normal pipeline temperatures and pressures. Unfortunately, this liquid propane could then damage the same pipeline infrastructure that was designed to transport, store, and distribute (dry) natural gas. The net result is that there is a limit to how much the industry can control the supply of propane from oil and gas production, but that can be a very good thing for U.S. consumers.
We highlight propane’s value as both a clean and abundant energy source and as a building block for many of the essential materials we use in our daily lives. With its easy and stable storage characteristics and excellent availability, propane is ideal for many applications – beyond your backyard barbeque. Also, based on its relative cost advantages, thanks to an increase in U.S. natural gas and oil production, we expect that the global demand for U.S. propane will continue to grow for the foreseeable future. Since we know that propane must first be gathered and processed near the wellhead and then transported to either the end consumer or export markets, we have reached the logical conclusion that investing in energy midstream companies – the processors, pipeline operators, LPG and LNG exporters, and, yes, even propane distributors – can lead to significant long-term returns for shareholders. As energy infrastructure experts, our team at DAC can help guide you in making the best long-term investment decisions on which midstream companies would be the most suitable for your investment and retirement portfolios.
- By The logo may be obtained from 20th Century Studios (The Walt Disney Company)., Fair use,
- Global Propane Consumption: https://www.imarcgroup.com/propane-market.
- U.S. Propane Statistics: https://www.eia.gov/dnav/pet/pet_sum_snd_a_EPLLPA_mbblpd_a_cur.htm.
- Propane History: https://www.nytimes.com/1912/04/01/archives/gas-plant-in-steel-bottle-dr-snellings-process-gives-months-supply.html.
ENERGY MARKETS BY THE NUMBERS
U.S. Total Crude Oil Production and U.S. Crude Rotary Rig Count (as of September 22, 2023):
- West Texas Intermediary (WTI) oil price was $90.03 per barrel (+13.3% m/m)
- U.S. oil production was 12.9 mm bbl/d (+0.8% m/m)
- U.S. oil rig count was 507 (-1.0% m/m)
The U.S. Commercial Crude Oil Inventories (excluding those in the Strategic Petroleum Reserve) and Inventory Changes (As of September 22, 2023):
- Inventory decreased by 6.7 million barrels month over month to 416.3 million barrels (8.2% below the 5-year average).
- Total crude stockpiles, including the Strategic Petroleum Reserve (“SPR”), decreased by 5.2 million barrels month over month to 767.3 million barrels.
U.S. Imports and Exports (as of September 22, 2023):
- U.S. crude oil 4-week average imports were 7.0 mm bbl/d, up 2.6% month over month.
- U.S. crude oil 4-week average exports were 4.3 mm bbl/d, up 8.6% month over month.
U.S. Refinery Inputs and Utilization Rates (as of September 22, 2023):
- U.S. crude oil refinery inputs averaged 1618 mm bbl/d for the week ending September 22, 2023. Fourweek inputs averaged 16.4 million bbl/d, 2.7% higher than the same time a year ago.
- Refinery Utilization Rate was 89.5%, down from 93.3% for the previous month. This is also lower than the same period last year, which was a 90.6% utilization rate.
This information is for illustrative purposes. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future
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