The Propane Market Outlook Alphabet Soup: Energy and Economic Recovery

1
The Propane Market OutlookAlphabet Soup Energy
and Economic Recovery

• Bruce B. Henning bhenning_at_icfi.com
• Michael D. Sloan msloan_at_icfi.comICF
  International
• August 11, 2009

2
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

3
(No Transcript)
4
U.S. Odorized Propane Demand
5
The Housing Market Slide
6
But, New Housing Starts will Rebound
7
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
8
Source Survey of Construction
9
Source American Housing Survey
10
Source Survey of Construction
11
Impact of Prices and Efficiency Trends on Propane
Use-per-Customer
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
(No Transcript)
16
(No Transcript)
17
Volatility in Recent Energy Prices
18
Broader Commodity Markets are Down
Source Commodity Research Bureau
19
Short-Term Residential Energy Price Outlook
20
U.S. Gross Domestic Product (GDP) and Industrial
Production
Assumed 2008-09 Recession

• U.S. GDP growth drives electricity demand growth
  and (to a lesser extent) residential and
  commercial energy demand growth.
• U.S. industrial production growth drives
  industrial electricity and 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
Forecast Annual Industrial Production Growth
Rate is constant at 2.3
Forecast Annual GDP Growth Rate is constant at
2.8
21
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 (Im not making
that up!)
22
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 worlds favorite market
• Will our trading partners build their own
  consumption?

23
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.

24
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).

25
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.

26
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
27
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.

28
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.

29
End-Use Distillate Fuel Prices Have Dropped
Faster than Propane Prices
30
Projected Annual Average Henry Hub Gas Price
(Annual Average - 2008/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
RACC
Residual Oil
Natural Gas
The gas prices as shown exclude the cost of CO2
emission allowances.
Sources Historical data from Platts Gas Daily
and EIA
31
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)

32
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.
33
Residential Conversion Opportunities
Most likely conversion opportunities
34
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.

35
Propane Conversion Potential in Commercial
Buildings
Source CBECS 2003 Data is subject to
double-counting and therefore should be used with
some caution.
36
Opportunities in Internal Combustion Engine
Markets

• Short-Term Challenges
• 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.

• Long-Term Opportunities
• 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

37
PERC Propane Market Analysis Tools
38
The PERC Propane Forecasting Models

• State-level Projections through 2015
• Residential Commercial
• Reseller/Cylinder Industrial
• Agricultural Internal Combustion

• County-level Projections through 2015
• Residential Only

39
Primary Data Sources

• US Census Bureau
• 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).

• 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

40
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.

41
The Propane Market OutlookAlphabet Soup Energy
and Economic Recovery

• Bruce B. Henning bhenning_at_icfi.com
• Michael D. Sloan msloan_at_icfi.comICF
  International
• August 11, 2009