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The Ridley Island Propane Export Terminal — Canada’s first propane export facility — has been a game changer since it started up in May 2019. Located along the coast of British Columbia, RIPET has been shipping record amounts of propane to Asian markets in recent months, just as Western Canadian propane production has been sagging due to the twin pressures of crude oil price weakness and COVID-19-related disruptions. With production down, RIPET gradually ramping up its export capacity, a second export terminal poised to come online nearby, and Canadian demand for propane holding steady, something has to give, right? Today, we examine the changing supply/demand outlook for Western Canadian propane, and what it might mean for railed exports to the U.S. Western Canada, the primary source of Canada’s propane supplies and exports, for many years has had a single direct export market for its excess propane supplies: the U.S. That changed 15 months ago, when AltaGas and Vopak’s jointly owned RIPET export facility in Prince Rupert, BC, began operations, providing Canada with its first access to Asian markets from its own shores. As we explained in Part 1 of this series, prior to RIPET’s start-up, Canada did have an indirect means of sending propane to Asia, namely by railing supplies down to the PetroGas-operated export terminal in Ferndale, WA. With firm delivery contracts in place for both of these terminals, propane exports have been running at strong levels in recent months — record levels, in RIPET’s case. The larger volume of propane being sent to Asia appears to have eliminated the typical seasonal excess of propane supply in Western Canada for the first time ever, and to have partly eroded propane-by-rail exports to the U.S., with multi-year lows being recorded in May.  As we mentioned in Part 1, another propane export terminal near RIPET — Pembina Pipeline’s 25-Mb/d Prince Rupert terminal — was originally slated to begin commercial operations in the third quarter of 2020. With the convulsions of the energy markets earlier this year, Pembina announced in May that the start-up had been delayed to the first quarter of 2021, and had earlier announced in March that a recently sanctioned 15-Mb/d expansion of the terminal, originally timed for 2023, would be deferred indefinitely. So, in the not-too-distant future, Canada will have two operating propane export terminals on its west coast, with nameplate export capacity at 75 Mb/d: 25 Mb/d from Pembina/Prince Rupert and 50 Mb/d from RIPET. And our understanding is that RIPET’s co-owners plan to increase that terminal’s throughput by 5 to 10 Mb/d annually until they reach its ultimate capacity of 80 Mb/d. All these changes signal an opportunity to update our near-term outlook for these exports from what we originally presented in Part 2 of When Propane and Exports Collide back in March 2020. Developing the new outlook involves four steps: (1) updating our forecast for Western Canadian propane supply with two scenarios, one a “base” outlook and the other a “recovery” outlook; (2) freshening our estimate of Canada’s domestic demand for propane; (3) revising the timeline for increased export volumes out of the two terminals in British Columbia; and (4) establishing two scenarios for how much propane is railed to the U.S. and determining how tight the propane market would be under those scenarios. Let’s begin with our outlook for supplies. In our March blog, we developed a revised supply outlook based on how things looked in late March to get some sense of how higher propane exports from Canada’s west coast might be impacted by lower supplies. We have updated that outlook with additional historical data that shows an even bigger drop than expected in the first five months of this year. Our “Base” scenario (blue line in Figure 1) anticipates a delayed recovery in supply, while our “Recovery” scenario (lime green line) builds in a rapid near-term recovery to levels close to prior highs by the end of this year, followed by slow-but-steady growth to the end of 2022. Figure 1. RBN Scenarios for Western Canada Propane Supplies. Sources: Canada Energy Regulator, Alberta Energy Regulator, BC Oil & Gas Commission, Statistics Canada, and RBN With our supply outlooks established, we next consider Canada’s domestic demand for propane. It should come as no surprise that, just like in many parts of the U.S., propane demand in Alberta and the rest of Canada is very seasonal — much stronger during the winter heating season than in the warmer summer months. We have elected to adopt a seasonal profile similar to what has occurred over the two previous years for both Alberta and the rest of Canada, but allowing for minor reductions in demand through the middle months of 2020 to account for softer demand as a result of COVID. Beyond that, we allow for a return to a modest, though still seasonal, demand recovery profile (post-COVID) to the end of 2022. This demand outlook will be combined with the supply outlook discussed above after we next consider our outlook for overseas exports from the RIPET terminal and planned Pembina/Prince Rupert terminal. Back in March, we laid out the view that exports from these two terminals would ramp up to around 70 Mb/d by the end of this year and hold at that level until the end of 2021 (stacked red and green columns in graph to left in Figure 2) versus a total combined export capacity of 75 Mb/d (black line). That was before we had more recent data for RIPET showing record exports near 50 Mb/d many months earlier than was originally expected. In addition, the delay in the start-up of the Pembina/Prince Rupert terminal was not yet announced; the setback pushes its expected exports from the third quarter of this year into early 2021. Given these changes, we still see exports from these two terminals rising to 70 Mb/d, but not until the middle of next year (graph to right in Figure 2). We have also allowed for an increase in RIPET’s exports (and its capacity) by 10 Mb/d in 2022 to reflect plans for a staged expansion of RIPET’s capabilities, as mentioned earlier. Figure 2. Canadian Propane Exports from RIPET and Pembina/Prince Rupert. Sources: CER and RBN So far, we have outlooks for propane supplies, Canadian demand, and exports from RIPET and Pembina/Prince Rupert. Before getting to the meat of the matter — propane rail exports to the U.S. — two other avenues for exports have to be addressed: pipeline and trucking. Both of these categories have been extremely small, averaging less than a combined 5 Mb/d over 2018 and 2019. As such, we have held these volumes unchanged at this level going forward to the end of 2022. As for rail exports to the U.S., they have been on a steady rise since April 2014, when the Cochin Pipeline — then owned by Kinder Morgan, and acquired in December 2019 by Pembina — was reversed from delivering propane supplies into the Midwest from Alberta to sending diluent supplies in the opposite direction to serve the blending needs of Alberta bitumen producers (see He Ain’t Heavy, He’s My Diluent). It was only a short time after that, starting in early 2015, that dedicated propane exports by rail also began shipping to the PetroGas-owned LPG export terminal in Ferndale (WA). These two events, and demand growth elsewhere in the U.S., helped to lift Canadian rail exports from an average of 40 Mb/d in 2014 to 123 Mb/d in 2019, based on data from the Canada Energy Regulator (CER). In some months of 2018 and 2019, rail exports exceeded Canada’s own demand, underscoring the importance and size of this outlet for propane.  We mentioned earlier that the seasonal excess of propane in Western Canada largely disappeared in 2019 with the start-up of RIPET. With the more recent downturn in Canadian propane supplies, it appears likely that the previous high rates of railed exports to the U.S. that occurred in 2019 will not be sustainable, especially once the Pembina/Prince Rupert terminal begins shipping propane early next year. With that in mind, we have chosen to develop two scenarios for rail exports. The first shows an average rate of 85 Mb/d, or about 70% of 2019’s rail export volumes — and similar to what was railed in 2016 — and a second scenario in which these exports average a rate of 60 Mb/d, or about 50% of 2019’s exports and similar to 2015. Combining all of our supply, demand, and export components yields the two charts we have in Figure 3, with the 85-Mb/d rail export scenario displayed on the left and the 60-Mb/d scenario on the right. Let’s consider each of the components that make up these charts. Our Base and Recovery scenarios for propane supply are shown in both charts with the blue (lower) and lime green (higher) lines corresponding to what appeared in Figure 1. Working our way up from the bottom of the stacked columns, Alberta and other Canadian demand (blue and orange bar segments) are followed by the very small components of pipe and trucked exports (pink and purple bar segments). Next is the outlook for exports from RIPET and Pembina/Prince Rupert (red and green bar segments) that correspond to the outlook we discussed earlier (see Figure 2). Finally, rail exports to the US (teal bar segments) correspond to the two scenarios that we have developed. Figure 3. Outlooks for the Western Canada Propane Market. Sources: CER, Alberta Energy Regulator, BC Oil & Gas Commission, Statistics Canada, and RBN Under the 85-Mb/d rail export scenario (left graph), the propane market in Western Canada still looks to be undersupplied most months (dashed red oval; compare blue and lime green lines to the height of the stacked columns), suggesting that even this lower-versus-2019 average for rail exports may not be attainable at all, especially if supplies hold to the lower, Base-scenario supply track. Under the more optimistic, Recovery-scenario supply track, our outlook suggests that there still could be many months in which rail exports cannot reach the level that we have assumed for this scenario. If we consider the more conservative rail export outlook averaging 60 Mb/d (right graph), the market still looks to be undersupplied using our Base case for propane supplies (stacked columns are still higher than the blue line; dashed pink oval). It is only in the more optimistic Recovery scenario that all forms of demand and exports can be met (lime-green line is higher than the stacked columns). With exports through RIPET — and through the Pembina/Prince Rupert terminal starting in early 2021 — locked in with firm contracts, rail exports to the U.S. seem likely to be averaging at lower levels than were seen during the 2019 highs, perhaps much lower. In an upcoming blog, we’ll look at how the expected ramp-down in railed exports of Canadian propane to the U.S. would affect specific regions in the Lower 48.  "Hold on to Your Hat" was written by Mick Jagger and Keith Richards and appears as the fourth cut on side one of The Rolling Stones’ 21st studio album, Steel Wheels. Jagger had most of this song written when he met up in Barbados with Richards to work on Steel Wheels in 1989. Personnel on the record were: Mick Jagger (lead vocal, rhythm guitar), Keith Richards (lead guitar), Ron Wood (bass), Charlie Watts (drums), and Chuck Leavell (keyboards). Steel Wheels was recorded between March and June 1989 at AIR Studio in Montserrat and Olympic in London. Produced by The Glimmer Twins (Jagger and Richards), and Chris Kimsey, it was released in August 1989. It marked the renewal of Jagger and Richards working relationship and would launch the band’s largest world tour to date. It would also be bassist Bill Wyman's final full-length album with the Stones. He would depart the band for good in January 1993. Steel Wheels was released in August 1989 and went to #3 on the Billboard 200 Albums chart. Four singles were released from the album. It has been certified 2x Platinum by the Recording Industry Association of America. The Rolling Stones are an English rock band formed in London in 1962. Seven members have passed through its ranks since its formation. The current lineup features original members Mick Jagger, Keith Richards, and Charlie Watts, along with long-time member Ron Wood. They have released 30 studio albums, 28 live albums, 26 compilation albums, three EPs, and 121 singles. The Rolling Stones have sold over 240 million records worldwide. They have won one Billboard Music Award, four Grammy Awards, three MTV Video Music Awards, and two World Music Awards. They are members of the Rock and Roll Hall of Fame and have a Grammy Lifetime Achievement Award. The band still records and tours, but touring is on hold due to COVID. |
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