Transcript Slide 1

The Propane Market Outlook
Alphabet Soup: Energy and Economic Recovery
Bruce B. Henning – [email protected]
Michael D. Sloan – [email protected]
ICF International
August 11, 2009
Overview
 2009 Propane Market Outlook
•
Key trends and assumptions in the recently published report
 Energy Market Behavior
•
The environment in which propane competes
 Uncertainty, Risk, and Opportunity
•
•
•
The economy and recovery
Commodity market regulation: objectives of legislative proposals
Electricity pricing: Climate change legislation is the key
•
•
But the impact is years away!
Oil and natural gas pricing: Coupled or going there separate ways
 Propane Market Assessment Tools
Questions are encouraged
2
3
U.S. Odorized Propane Demand
Near-Term Odorized Propane
Consumption Forecast
12,000
Million Gallons
10,000
8,000
6,000
4,000
2,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Commercial
Industrial
Internal Combustion
Residential
Resellers
Agriculture
4
The Housing Market Slide
U.S. National Housing Units Authorized
2,500
Thousands of Units
2,000
1,500
1,000
500
0
2000
2001
2002
2003
2004
5
2005
2006
2007
2008
But, New Housing Starts will Rebound
Quarterly Housing Starts and Forecasts
1.6
Annualized Housing Starts (Millions)
Federal Reserve
Mortgage Bankers Assoc.
1.4
Fannie Mae
Freddie Mac
1.2
National Assoc. of Realtors
1.0
0.8
0.6
0.4
2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
6
NAHB Forecast of New Single-Family
Home Sales
2009: 379,000; 39% below 2008
2010: 517,000; 36% above 2009
Thousands of Units, SAAR
Source: NAHB Spring Board Meeting
7
Propane Home Heating Market Share of New
Construction Starts
7.00%
6.00%
100,000
5.00%
80,000
4.00%
60,000
3.00%
40,000
2.00%
Propane Single-Unit Housing Starts
Propane Market Share
Propane Single-Unit Housing Starts
120,000
Propane Market Share
20,000
1.00%
-
0.00%
2000
2001
2002
2003
2004
2005
2006
2007
Source: Survey of Construction
8
Site-Built Households
Using Propane by End-Use
9,000,000
1997
1999
2001
2003
2005
2007
8,000,000
Million Households
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
All End Uses
Space
Heating
Water Heating
Cooking
Drying
Source: American Housing Survey
9
Propane Market Share of New Home
Construction by Household Sales Price
14.0%
12.0%
Market Share
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Least Expensive
20%of Homes
2000
2001
20-40%
2002
40-60%
60-80%
2003
2004
Most Expensive
20%of Homes
2005
2006
No Sales Price
(Built for Owner)
2007
Source: Survey of Construction
10
Impact of Prices and Efficiency Trends on
Propane Use-per-Customer
Weather Normalized Propane Primary Space
Heating Consumption per Household
900
800
Gallons per Household
700
600
500
400
300
Site-Built Housing Base Case
200
Manufactured Housing Base Case
Site-Built Housing No Price or Efficiency Impact
100
Manufactured Housing No Price or Efficiency Impact
0
2000
2001
2002
2003
2004
2005
2006
11
2007
2008
2009
2010
2011
2012
Residential Propane Demand Forecast by End-Use
6,000
Million Gallons
5,000
4,000
3,000
2,000
1,000
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Primary Space Heating
Water Heating
Manufactured Housing
Supplementary Space Heating
Cooking/Other Applications
Seasonal Housing
12
Commercial Odorized Propane Demand by Region
Propane Demand (Million Gallons)
2,500
2,000
1,500
1,000
500
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
New England
West North Central
West South Central
Middle Atlantic
South Atlantic
Mountain
13
East North Central
East South Central
Pacific
Propane Demand Forecast for the
Internal Combustion Sector
900
800
600
500
400
300
200
100
Forklift
On-Road Vehicles
14
Non-Road Vehicles
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
0
19
Million Gallons
700
Propane On-Road Vehicle Sales
14,000
Number of Vehicles by Type
12,000
10,000
8,000
6,000
4,000
2,000
2003
2004
2005
2006
2007
2008
2009
HDV's (Bluebird Buses and others)
LDV's (Roush F150 and others)
Secondary Market Conversions
15
2010
2011
2012
Mt. Belvieu Historical and
Projected Spot Price Scenarios
2.00
August 2008 Scenario
1.80
1.40
June 2009 Scenario
1.20
1.00
0.80
0.60
April 2009 Scenario
0.40
0.20
Historical Prices
NYMEX
Projected Prices
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Dollars / Gallon
1.60
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Volatility in Recent Energy Prices
Historical Spot Prices &
NYMEX Futures Strip August 2009
$30
NY Harbor Heating Oil Spot
WTI Crude
$25
Mt. Belvieu Propane
$/MMBtu
Henry Hub Natural Gas
$20
$15
$10
$5
$-
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7/31/2009
1/31/2009
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7/31/1998
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7/31/1997
1/31/1997
7/31/1996
1/31/1996
7/31/1995
1/31/1995
Index Value
Broader Commodity Markets are Down
CRB Spot Index
600
500
400
300
200
100
0
Month-Day-Year
Source: Commodity Research Bureau
Short-Term Residential Energy Price Outlook
Monthly Residential Energy Prices
Source: EIA - July 2009
40
35
$/MMBtu
30
25
20
15
10
Propane
No. 2 Distillate
Electricity
Natural Gas
5
Forecast
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U.S. Gross Domestic Product (GDP)
and Industrial Production
10%
 U.S. GDP growth drives
electricity demand growth and
(to a lesser extent) residential
and commercial energy
demand growth.
 Actual GDP is applied through
Q4 2008 and actual industrial
production is applied through
Q3 2008
 From Q3 2008 through Q1
2010 a recession is assumed.
•
•
Average GDP growth for the period
is -2.0%.
The recession bottoms out at -6.3%
annualized GDP growth in Q4 2008.
 After Q1 2010, the GDP growth
rate bounces to 4.0% for Q2
before being is held constant at
2.8% thereafter.
Historical
Period
6%
Annualized Growth Rate
 U.S. industrial production
growth drives industrial
electricity and energy demand
growth.
8%
Assumed 2008-09
Recession
4%
2%
0%
-2%
Forecast Annual
GDP Growth Rate
is constant at
2.8%
-4%
-6%
-8%
Forecast
Annual
Industrial
Production
Growth Rate
is constant at
2.3%
-10%
2003
2004
2005
GDP
20
2006
2007
2008
2009
2010
Industrial Production
Is that Forecast of Recovery Correct?
Alphabet Soup
The “L”
The “V”
The “W”
The “U”, sometimes called the “bathtub”
The “inverted square-root sign”
(I’m not making that up!)
21
What will Determine the Shape of Recovery
 Stimulus and Bailouts
•
•
“One shot wonder” or “priming the pump”
Moral hazard and government control
 Capital and Debt Markets
•
•
Costs and availability of debt and capital
Re-pricing of risk
 Another Shoe to Drop?
•
Commercial mortgage default and regional banks
 The Deficit and the Perception of Future Deficits
•
•
Will government spending and tax revenue be brought into better balance by
2012 and beyond?
Will the debt have to be “monetized?” The risk of long-term inflation.
 Consumer Spending vs. Consumer Savings
 Global Economic Performance
•
•
The U.S. is still the biggest economy in the world and the world’s favorite market
Will our trading partners build their own consumption?
22
Energy Policy and Climate Change Regulation –
The 800 Pound Gorilla is Coming and the Train
Has Left the Station
 The economic downturn threatened to stall further Federal action,
however, that moment has passed.
 The Obama Administration is committed to national climate regulation.
•
•
GHG Reporting Rule
Support for national cap and trade legislation that passed the House
 2010 federal budget proposal assumes the existence of a GHG cap
and trade program in 2012.
•
•
14 percent below 2005 levels by 2020, and 83 percent below 2005 levels by 2050
All allowances auctioned with approximately 80% of proceeds going directly to
taxpayers and the remainder to support clean energy.
 If the Federal government does not act, the states certainly will.
23
GHG Regulatory Overview for Propane
 Propane is not regulated as a GHG.
 Regulated emissions from the propane industry would be CO2
emissions or fugitive methane emissions.
 Few if any regulated emissions likely for propane dealers and
distributors.
 Gas processors are affected for CO2 and methane emissions in
multiple programs.
 Propane throughput is regulated at the point of fractionation under
the House Waxman-Markey bill, but this could change.
 States will receive some allowances earmarked for efficiency
programs for oil and propane customers (parallel to electricity and
natural gas customers).
24
GHG Regulatory Overview for Propane
 Under the new Waxman-Markey proposal, propane throughput will be
regulated at:
•
•
•
Processing plants
Refineries
Import points
 Regulated emissions from the propane industry would be CO2
emissions.
•
Propane is not likely to be regulated as a GHG.
 Few if any regulated emissions likely for propane dealers and
distributors.
 Climate change and energy policy also likely to result in direct
regulation influencing propane markets.
•
•
New residential and commercial energy efficiency standards and transportation
fuel efficiency standards are likely.
Federal and state tax incentives to “Do the Right Thing”.
25
State Initiatives on GHG Regulation
Western Climate
Initiative (WCI)
Signed: Feb 2007
Scheduled launch: 2012
Regional Greenhouse
Gas Initiative (RGGI)
Signed: 2005
Launch: Jan 2009
States with stripes have state-specific
GHG reduction goals or mandates.
Midwest Greenhouse Gas
Reduction Accord (MGA)
Signed: Nov 2007
Scheduled launch: 2012
26
Market Implications for Propane
 Competitive Price Impacts
•
Propane price will reflect at least the cost of upstream emission allowances
• likely around 20 – 50 cents/gallon starting in 2012.
•
Electricity and petroleum prices will be similarly affected starting in 2012.
• Gasoline price impacts:
30 – 75 cents/gallon
• Diesel price impacts:
35 – 90 cents/gallon
• Coal based electricity prices: 2 – 6 cents/Kwh
•
LDC natural gas prices will be affected in 2016.
 Competitive Market Impacts
•
The electric industry will fight back.
•
•
•
•
•
“Free Allowances”???
Renewable power, nuclear power.
Improvements in electricity technology.
Increased incentives for high efficiency equipment, including geothermal heat pumps,
high efficiency all electric homes.
Opportunities for propane engine applications.
• Increased cost of diesel and gasoline fuels.
• Increased costs of environmental compliant diesel engine technologies.
27
Relationship Between Crude Oil Prices,
Distillate Prices and Propane Prices
 In the short-term, price advantage of propane has declined as
distillate demand and distillate prices have dropped faster than
propane.
•
•
Diesel and other distillate prices have returned to more historical levels
with respect to propane.
Crude oil and distillate stocks currently well above average due to demand
destruction and economic downturn.
 Long-term structural relationships likely to result in permanent
shift upward in distillate prices relative to propane.
•
•
•
Environmental regulations on diesel and marine fuels.
Global production slate shifting towards heavier, sour crude oil.
Growth in demand for transportation fuels.
28
End-Use Distillate Fuel Prices Have
Dropped Faster than Propane Prices
Residential Propane and Heating Fuel Sales Prices
U.S. Average $/MMBtu
40.00
35.00
25.00
20.00
15.00
Propane Price
10.00
No. 2 Distillate Price
5.00
29
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($/MMBtu)
30.00
Projected Annual Average Henry Hub Gas
Price (Annual Average - 2008$/MMBtu)
$22.00
$20.00
$18.00
Fuel Prices
(2008 Dollars per MMBtu)
After the 2008-09
recession, Henry Hub gas
prices will average
between $7.00 and $9.00
per MMBtu - 1990 levels
will not return.
The recession, combined
with growth in shale gas
production, results in low
prices in 2009.
Distillate
$16.00
$14.00
RACC
$12.00
Residual Oil
$10.00
Natural Gas
$8.00
$6.00
$4.00
$2.00
$0.00
2000
The gas prices as shown exclude the cost of CO2 emission allowances.
2005
2010
2015
2020
2025
Sources: Historical data from Platts Gas Daily and EIA
30
Key Challenges and Opportunities for
Industry
 Understanding and taking advantage of regional/local market
segmentation
 Maintaining current markets
•
•
•
Competition from conventional and geothermal heat pumps in the core
residential heating market
Propane use-per-customer decline
Manufactured housing sector decline
 Maximizing opportunities in current energy price environment
•
•
Expected longer term price advantage relative to distillate fuel oil
Short-term price advantage relative to electricity (in certain areas and
markets)
31
Key Challenges and Opportunities for
Industry (Continued)
 Participating in energy, environmental policy, and regulatory process
and maximizing green opportunities.
•
•
Engaging policymakers and stakeholders to recognize propane as
environmentally friendly fuel
Taking advantage of state and local environmental regulations and energy
policies
 Positioning propane in emerging markets that value environment and
energy efficiency
Propane is a reliable domestic source of energy that offers a number of
advantages over many other fuels, including low emissions, ease of use, and a
reputation for reliability and safety. As a result, propane needs to be recognized
as a beneficial and environmentally friendly fuel when developing new energy
and environmental policies and regulations.
32
Residential Conversion Opportunities
Existing Propane Housing Market
(thousands)
Homes Using Propane
Primary Space Heating
Cooking
Water Heating
Clothes Dryer
By Housing Type
By Region
Total
ManuSite-Built
Northeast Midwest South
U.S.
factured
9,720
8,050
1,670
2,109
2,558
3,912
6,095
4,966
1,129
808
2,146
2,277
5,041
3,848
1,193
1,503
1,120
1,840
4,133
3,678
455
841
1,265
1,236
1,351
1,203
148
472
403
250
Homes With Propane But Without…
Primary Space Heating
Cooking
Water Heating
Clothes Dryer
3,625
4,679
5,587
8,369
West
1,142
864
578
792
228
3,084
4,202
4,372
6,847
541
477
1,215
1,522
1,301
606
1,268
1,637
412
1,438
1,293
2,155
1,635
2,072
2,676
3,662
278
564
350
914
Average Propane Appliance Replacements Per Year
Primary Space Heating (20 year lifespan)
181
154
27
65
21
82
14
Cooking (10 year lifespan)
468
420
48
61
144
207
56
Water Heating (20 year lifespan)
466
364
101
106
108
223
29
Clothes Dryer (12 year lifespan)
697
571
127
136
180
305
76
Source: American Housing Survey 2007
Most likely
conversion
opportunities
33
Other Opportunities in the Residential
Propane Market
 New propane technologies.
•
•
High efficiency tankless water heaters.
“Freewatt” propane heating/power systems, backup generation, and other
applications.
 Outdoor living applications.
 “Off the main” propane communities.
34
Propane Conversion Potential in
Commercial Buildings
Commercial Buildings Using Propane
Northeast
Midwest
South
West
Grand Total
761,145
1,304,739
1,873,195
919,670
4,858,750
Buildings Using Propane
Percent of Buildings Using Propane
73,016
9.6%
172,798
13.2%
176,356
9.4%
79,757
8.7%
501,927
10.3%
Buildings Using Propane by End Use
Primary Space Heating
Percent of Buildings with Space Heat
16,757
2.4%
125,404
10.9%
109,785
7.1%
55,730
7.3%
307,676
7.4%
Water Heating
Percent of Buildings with Water Heating
21,894
3.5%
43,620
4.3%
34,517
2.7%
28,218
4.0%
128,249
3.5%
Cooking
Percent of Buildings with Cooking
35,214
22.4%
25,162
12.2%
27,423
9.0%
19,704
14.7%
107,504
13.4%
Total Buildings
Source: CBECS 2003
Data is subject to double-counting and therefore should be used with some caution.
35
Opportunities in Internal Combustion
Engine Markets
 Short-Term Challenges:
•
•
•
•
•
 Long-Term Opportunities:
•
Availability and initial cost of new
propane technologies.
Turmoil in automotive industry.
Economic outlook in the private
sector and funding cuts in the
public sector.
Decline in diesel fuel prices
relative to gasoline and propane.
Uncertainty over tax credits.
•
•
•
New technologies and new vehicles
are beginning to reach the market.
Distillate fuel oil prices are expected
to increase relative to propane and
gasoline.
Propane is a clean domestically
produced fuel.
“New” markets with major potential
• Commercial mowers
• Buses and other on-road vehicles.
• Stationary engine applications
– Irrigation
– Back-up power
– Engine driven heat pumps
36
PERC Propane Market Analysis Tools
37
The PERC Propane Forecasting Models
Propane Database and
Forecasting Model v6.0
County Residential
Propane Model v3.0
(PDFM)
(CRPM)
 State-level Projections through 2015
 County-level Projections through 2015
Residential
Reseller/Cylinder
Agricultural
Residential Only
Commercial
Industrial
Internal Combustion
38
Primary Data Sources
 US Census Bureau
•
•
•
•
 National Oceanic and Atmospheric
Administration (NOAA)
 U.S. Department of Housing and Urban
Development (HUD)
 National Association of Home Builders
(NAHB)
 Gas Appliance Manufacturers
Association (GAMA)
 Propane Industry Sources
 Harris Interactive surveys for PERC
1990 and 2000 Census
American Community Survey
American Housing Survey
Survey of New Residential Construction
 U.S. Department of Energy Energy Information Administration
(EIA)
•
•
•
•
Residential Energy Consumption Survey
(RECS)
Commercial Building Energy consumption
Survey (CBECS)
Manufacturing Energy Consumption Survey
(MECS)
Vehicle Inventory and Use Survey (VIUS)
 American Petroleum Institute
•
Sales of Natural Gas Liquids and Liquefied
Refinery Gases (annual survey).
Much of the data (including the census data on propane
households) is included in the models.
39
New: PERC Market Metrics Initiative
Website
PERC Forecasting Models and the Propane Market Outlook reports
are now available on the new PERC MMI Website:
www.propanecouncil.org/mmi/
The information on this website will be updated on a regular basis.
The forthcoming issue of PERC's quarterly newsletter, In Touch,
will come with a copy of the executive summary of the 2009 Propane
Market Outlook.
40
The Propane Market Outlook
Alphabet Soup: Energy and Economic Recovery
Bruce B. Henning – [email protected]
Michael D. Sloan – [email protected]
ICF International
August 11, 2009