Propane Supply Alternatives Preliminary Results Discussion...Preliminary Results Discussion Eric...

PUBLIC SECTOR CONSULTANTS @PSCMICHIGAN PUBLICSECTORCONSULTANTS.COM

Propane Supply Alternatives: Preliminary Results Discussion

Eric Pardini, Jill Steiner, and Maggie Pallone, Public Sector Consultants

Little Bear East Arena North and South Conference Rooms

275 Marquette St. St. Ignace, Michigan 49781 February 7, 2020, 10:00 AM–3:30 PM


https://PUBLICSECTORCONSULTANTS.COM

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Michigan Propane Study Objectives

• Model current propane supplies system based upon existing research that assesses Michigan’s existing propane supply and distribution system throughout the state and with respect to each peninsula.

• Identify alternative approaches to meeting the propane needs of Michigan’s residents and businesses to optimize the propane distribution network for reliability, cost, and emergency preparedness

PUBLIC SECTOR CONSULTANTS @PSCMICHIGAN PUBLICSECTORCONSULTANTS.COM 2


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Study Approach

• Document underlying inputs, assumptions, and methodologies

- Conduct comparative analysis of existing studies

- Survey industry partners

- Define inputs, assumptions, and sensitivities

- Develop and program propane supply model

• Develop and assess alternative propane pathways to optimize the propane distribution network

- Assess demand for propane in the state

- Identify supply alternatives

- Model supply alternatives



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Propane Industry Characteristics

Statewide Annual Propane Consumption • Michigan is a top propane

600

consuming state and has the highest residential propane

500

consumption in the U.S.

• Average consumption over the past five years was 473 M

illio

ns o

f ga

llon

s

400

300

200

million gallons. 100

0

Residenital Commercial Industrial

Transportation Average

Source: Propane Education and Research Council

2013 2014 2015 2016 2017



Propane Industry Characteristics

Annual Propane Consumption, 2017 • The Lower Peninsula is

500,000,000

responsible for 93 percent of 450,000,000

Upper Peninsula,

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34,245,120

Lower Peninsu

la, 454,970,

880

U.P. - Transportation

400,000,000 U.P. - Industrial statewide propane 350,000,000

U.P. - Commercial consumption. 300,000,000

• The remaining 7 percent of

Gallo

ns

250,000,000

200,000,000

consumption occurs in the 150,000,000

U.P. - Residenital

L.P. - Transportation

L.P. - Industrial

L.P. - Commercial 100,000,000

50,000,000

Upper Peninsula. L.P. - Residenital • Residential customers

0

Source: Propane Education and Research Council account for 78 percent of all propane consumption.



Conway

Mont Belvieu

Rockies & Bakken

production flows to

Conway

Decreasing rail

from Canada

Legend Market hub

Propane pipeline flow

Y grade pipeline flow

Y grade & propane pipeline flow

Rail

Marine import terminal

Production to Mont Belvieu

for fractionation and

storage

Increasing focus on

moving volumes south

PADD 4

PADD 2

PADD 1

PADD 3

Distributors adding on

site storage; improving

pipeline and rail capacity

AZ storage serves

PADD 5

Most infrastructure focused on Gulf Coast

petrochemical consumers and export terminals

Sarnia

UT storage

dominates PADD 4

Increasing exports and

storage at Marcus Hook

Marcus Hook

* Superior, WI depropanizer Rapid River, MI depropanizer

* Kalkaska MI depropanizer

*

~

Rockies & Bakken producti on ftows to

Conway

'\. Decreasing rail , from Canada

' ~ ... - ior, W I depropanizer . - - · · er, Ml depropamzer ' --... ", ... ___

---.

storage

PADD2

Increasing focus on moving volumes south

Mont-'Belvieu Most infrastructure focused on Gulf Coast

petrochemical consumers and export termi nals

f

L_ Marcus Hook Increasing exports and


Legend = Market hub

+ = Propane pipeline flow + = Y-grade pipeline flow

~ eia1

= Y-grade & propane pipeline flow - = Rail ......, = Marine import terminal

Propane Supply

-

=

=

= -

= -

=

=

Source: EIA



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Primary Sources of Propane Supply

Upper Peninsula • Production

- Rapid River, MI

- Superior, WI

- Direct rail supply from Western Canada

• Storage

- Kincheloe, MI

Lower Peninsula • Production

- Sarnia, ON Production

- Kalkaska, MI Production

- Marathon Refinery Detroit, MI

• Storage

- Marysville, MI

- St. Clair, MI

- Alto, MI

• Neighboring States

- Refineries in IL, IN, OH

- Other propane producers and terminals



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Propane Storage

• Michigan has significant propane storage capacity.

• Provided 21 percent of PADD 2 stocks on average for the past 5 years.

Michigan Propane Storage Capacity (gallons)

Underground Storage 582,080,100

Aboveground Storage 3,252,144

Total 585,332,244

Source: MPSC

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Source: EIA

PUBLIC SECTOR CONSULTANTS

Propane Stocks 35%

30%

25%

20%

15%

10%

5%

0%

Wisconsin Ohio Minnesota Indiana Illinois Michigan Percent of PADD 2 Stocks in Michigan

@PSCMICHIGAN PUBLICSECTORCONSULTANTS.COM 8

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April

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Ju

ly

2015 2016 2017 2018 2019

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Scenarios Evaluated

• Scenario One: Supply Disruption on Enbridge’s Lakehead system between Edmonton, Alberta to Superior, Wisconsin

• Scenario Two: Supply Disruption on Enbridge’s Line 5 from Superior, Wisconsin to Sarnia, Ontario

• Scenario Three: Weather related supply disruption (including polar vortex and/or wet/ late drying season)



f(

\ ~ I

~ line 18, 70

J \ ~ Line19,45

' ~ 0

Edmonton

·~ Line 1, 2A, 3, 4, fi7

4,65,G7

Montreal

Express Line 1, 2B, 3, 4, 67

Line5 Line9

Toronto \ Lewi /f Line 6, 14, 61

Westover ine78 .....,.../ 0 o Kiantone

Dakota Access

Stock Nanticoke -:-:-7

.,.1

Line79

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Scenario One – Enbridge Line 1 Disruption

Source: Enbridge



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Scenario One – Enbridge Line 1 Disruption

• The loss of propane production at Superior, Rapid River, and Sarnia in the event of a Line 1 disruption would impact between 34-55 percent of Michigan’s statewide propane supply.

• Rapid River and Superior are estimated to provide up to 90 percent of propane supply in the Upper Peninsula.

• The Lower Peninsula would see up to half of its propane supplies impacted.*

* There are competing estimates as to the amount of Michigan’s propane supply that is sourced from Line 5. Estimates range from 34 percent up to 55 percent of Michigan’s total propane needs are provided via Line 5. PSC continues work to refine this number.



Scenario Two – Enbridge Line 5 Disruption

Source: Enbridge

Line 1, 2B, 3, 4, 67

Lines

Line78 Wes er

· ton Na ..

ia ~ ----,

Line64 p,. -=--i.--.· LI 1

lff ith artsdale

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Scenario Two – Enbridge Line 5 Disruption

• The loss of propane production at Rapid River and Sarnia in the event of a Line 5 disruption would have a significant impact on Michigan’s propane supply.

• Rapid River is estimated to provide 65 percent of the propane supply in the Upper Peninsula.

• The Lower Peninsula would see up to half of its propane supplies impacted.*




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Scenario Three – Extreme Weather Events

• Propane consumption is driven, in large part by weather. PSC estimates between 60-65 percent of total propane consumption is weather dependent.

• PSC calculated Michigan’s weather normalized propane consumption as a basis for this analysis, but also developed a propane demand profile for Michigan that illustrates the potential increased demand resulting from an extreme cold snap.



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• For Scenario Three, PSC assumed that monthly heating degree days would be 20 percent higher than the 10-year average from 2010-2019. For comparison, 2014 was the 7th coldest year recorded since 1919. Compared to the average from 2010-2019, 2014 witnessed 15.3 percent more heating degree days.

Heating Degree Days

Period January February March April May June July August September October November December Total

1919-2019 1,336.6 1,158.5 991.6 591.3 289.2 63.7 14.5 34.9 138.6 464.1 818.7 1,176.6 7,078.1

2010-2019 1,305.6 1,130.4 943.8 570.9 225.4 47.5 9.4 23.0 101.9 418.6 798.2 1,084.1 6,658.8

2014 1,549.0 1,368.0 1,233.0 580.0 253.0 40.0 40.0 31.0 146.0 462.0 938.0 1,036.0 7,676.0

Scenario 3 1,566.7 1,356.5 1,132.6 685.1 270.5 57.0 11.3 27.6 122.3 502.3 957.8 1,300.9 7,990.6



II I I 0-~ 0-~ a' ~~ ~rs\

e, ':,-s~ r ~ ~ ~ ~ .;s. ~..:::;. ~r§ "?-Q ':,V'~ ~ :f5 §3 :f5 :f5 ':,0-~ «.~ "?-..::s ~0 ~ ~0 00

c.:JoQ a ~o <::)0

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80

90 14 percent increase in peak month consumption

10 percent increase in

annual demand

Mill

ion

s o

f G

allo

ns

70

60

50

40

30

20

10

0

Normal Weather Extreme Weather



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Sensitivities Analysis

• Sensitivity One: Weather Variability Affecting Seasonal Heating Demand

- Results in increase or decrease in propane demand based on seasonal temperatures (Scenarios 1&2)

• Sensitivity Two: Demand Reduction through Conservation

- Results in decreased propane demand over the long run, estimated at 1.5 percent per year (All Scenarios)

• Sensitivity Three: Customer Storage Optimization

- Results in increased propane stocks within the state that can potentially mitigate seasonal pricing impacts (All Scenarios)



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Propane Modeling Process • Inventory and characterize supply options

- Existing options

• Quantity and cost

- Alternate options

• Fuel, transportation, and other costs

• Develop demand curves

- Weather-normalized, Flat, Extreme weather,

- Statewide, Lower Peninsula, Upper Peninsula

- Residential, commercial, industrial, agricultural, and transportation

• Calculate cost of supply alternatives from point of origin to delivery at designated points Michigan

• Estimate impact of scenarios (line outages or weather) on demand and supply

• Balance supply and demand with alternate options



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Modeling Supply Alternatives


Hub Price

Rail to Intermediate or Final Destination

Pipeline Truck

Cost based on miles and time estimates for transport from pipeline offloading to site to in-state delivery points

Costs based on FERC tariffs

Cost based on industry estimates

Different combinations of origination, transportation options, and sensitivities

yield hundreds of permutations

19

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$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

2017 2018 2019

Do

llars

pe

r g

allo

n

Edmonton, Alberta^ Conway, Kansas^ Mont Belvieu, TX*

Supply Alternatives – Sources of Propane $0.80

• North America has an $0.70

$0.60 abundance of propane. The question is how to get it to end users.

• Three major North American Do

llars

pe

r g

allo

n

$0.50

$0.40

$0.30

Edmonton

Mont Belvieu

Conway

$0.20

supply hubs $0.10

- Edmonton, Alberta $0.00

- Mont Belvieu, Texas

- Conway, Kansas 2019

Edmonton Mont Belvieu Conway

Source: EIA



Conway

Mont Belvieu

Legend Market hub

Propane pipeline flow

Y grade pipeline flow

Y grade & propane pipeline flow

Rail

Marine import terminal

PADD 4

PADD 2

PADD 1

PADD 3

Most infrastructure focused on Gulf Coast

petrochemical consumers and export terminals

Sarnia

Increasing exports and


Marcus Hook

~ L__ Mont Belvieu n Gulf Coast

Most infrastructure f~~~!~~ ~xport terrrinals petrochemical consum

f

I Hook L-- Marcus x orts and

Increasing e P s Hook storage at Marcu

Legend M rket hub

= a · eline flow = Propane pip ·ne flow

= Y-grade pipell ane pipeline fl = Y-grade & prop

= Rail . rt terminal = Marine impo

Supply Alternatives – Transportation Options

=

=

= -

= -

=

=

Source: EIA



•

~

♦

♦

•

♦

♦

f

Supply Alternatives – Transportation Options

Identified propane rail terminal

Source: EIA



~

NORTH DAKOTA

SOUTH DAKOTA

y Dallas

0

ARKANSAS

MISSISSIPPI

ALABAMA

f

Atlanta 0

GEORGIA

NORTH o CAROLINA

Charlotte

SOUTH CAROLINA

Supply Alternatives – Regional Terminals

Source: OPIS/STALSBY Petroleum Terminal Encyclopedia



~

NORTH DAKOTA

SOUTH DAKOTA

NEBRASKA

ted States

o · -

KANSAS

Dallas

KENTUCKY

Nashville 0

TENNESSEE

ARKANSAS

MISSISSIPPI ----

f

Atlanta 0

® Montrea

0 Ottaw,.__ __ _

VERM

® DE WEST

VIRGINIA Washington

VIRGINIA

NORTH o CAROLINA

Charlotte

SOUTH CAROLINA

NGL and Propane Terminals

Map includes Alto, Rapid River, Kincheloe, and Kalkaska Facilities Source: OPIS/STALSBY Petroleum Terminal Encyclopedia



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1 nunaer 1:rny r. 0 _,,.,---

~ - ~ National Forest s ~

)uluth 0

•ster

:;edar Rapids 0

Iowa City 0

\,'l>

WISCONSI N Green Bay 0

Oshkosh 0

-'

Madison Milwaukee 0 0

Rockford 0

Chicago 0

0 Naperville

I

MICHIGAN

0 Ann Arbor

Toledo 0

Manitoulin Island

Sudbury 0

London 0

Cleveland 0

Delivery Points to Michigan

Kincheloe Western Upper Peninsula – Rapid River Rapid River

Eastern Upper Peninsula – Kincheloe Kalkaska

Northern Lower Peninsula – Kalkaska

Western Lower Peninsula – Alto

Eastern Lower Peninsula – Marysville Alto Marysville



~

NORTH DAKOTA

SOUTH DAKOTA

NEBRASKA

ted States

o · -

KANSAS

Dallas

9

0 Nashville

0

9 9

TENNESSEE

ARKANSAS

____ M_ISSISSIPPI

f

Atlanta 0

WEST VIRGINIA

NORTH o CAROLINA

Charlotte

SOUTH CAROLINA

NGL and Propane Terminals – Marysville

Ranges are approximate Source: OPIS/STALSBY Petroleum Terminal Encyclopedia



~

NORTH DAKOTA

SOUTH DAKOTA

NEBRASKA

ted States

o · -

KANSAS

Dallas

9 Montrea

0 ® Ottaw·<>---

9 0

fo § c(Oo . ' "

VERM

NEW YORK

' 99 9 OHi

0 KENTUCKY

Nashville 0

TENNESSEE

ARKANSAS

MISSISSIPPI

Atlanta 0

----

f

WEST VIRGINIA

MAS!

Cl

NNSYL ftUA NewoYork

... hi1Q alphia

MARYLAND NJ

® DE Washington

VIRGINIA

NORTH o CAROLINA

Charlotte

SOUTH CAROLINA

NGL and Propane Terminals – Alto




mD

NORTH DAKOTA

SOUTH DAKOTA

NEBRASKA

ted States

o · -

KANSAS

Dallas

9.

KENTUCKY

Nashville 0

TENNESSEE

ARKANSAS

MISSISSIPPI ~--~---·-··--

f

Atlanta 0

Montrea 0 ®

Ottaw"-'---

VERM

® DE WEST

VIRGINIA Washington

VIRGINIA

NORTH o CAROLINA

Charlotte

SOUTH CAROLINA

NGL and Propane Terminals – Kalkaska

~350 miles




o · -

NORTH DAKOTA

SOUTH DAKOTA

NEBRASKA

ted States KANSAS

9 9

Dallas

--3so miles

ARKANSAS

9

KENTUCKY

Nashville 0

TENNESSEE

Atlanta 0

~-----·- MISSISSIPPI

f

Montrea 0 @

Ottawa---VERM

NEW YORK

9 MA5'

('q~NNSYL l"li " New,Yor~1

.. hlQ alphla MARYLAND NJ

WEST @ DE VIRGINIA Washington

VIRGINIA

NORTH o CAROLINA

Charlotte SOUTH

CAROLINA

NGL and Propane Terminals – Kincheloe




~

NORTH DAKOTA

SOUTH DAKOTA

NEBRASKA

ted States

o· -

KANSAS

Dallas

KENTUCKY

Nashville 0

TENNESSEE

ARKANSAS

---~M. ISSISSIPPI

f

Atlanta 0

Montrea 0 ®

Ottawa--- .

VERM ntcq • NEW YORK Hil

\ MAS'

ft ~q~NNSYL ~ UA New0Yor~1

OHIO. ~ ft hi1 .. alphia

MARYLAND NJ

WEST ® DE VIRGINIA Washington

VIRGINIA

NORTH o CAROLINA

Charlotte

SOUTH CAROLINA

~350 miles

NGL and Propane Terminals – Rapid River




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Demand Curves

• Determine weather-sensitive and non-weather-sensitive propane usage

- Bottom-up analysis by sector end-use

- Regression analysis

• Calculate weather-sensitive demand using “normal weather”

• Calibrate using actual weather data

• Allocate consumption between Upper and Lower Peninsulas



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Weather-Normalized Demand Curve

0

10

20

30

40

50

60

70

80

Mill

ion

ga

llon

s

14 percent of annual consumption

3 percent of annual consumption

Lower Peninsula Upper Peninsula



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Anticipated Impact of Scenarios Impact of Scenario One on Michigan’s Propane Supplies

Statewide 170-275 million gallons 34-55 percent*

Upper Peninsula 30-35 million gallons 85-99 percent

Lower Peninsula 140-240 million gallons 30-52 percent

Impact of Scenario Two on Michigan’s Propane Supplies

Statewide 160-275 million gallons 30-55 percent*



Impact of Scenario Three on Michigan’s Propane Supplies

Statewide 45-55 million gallons 9-11 percent






Preliminary Results

$1.20

$1.00 Rapid River Spot Price, 2018

.. .. .. .. -...

... ... ... ... ...

.. ...

,.., ... ...

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Co

st p

er

ga

llon

$0.60

$0.40

$0.20

$0.00 Delivery to Rapid River

$0.80

Rapid River Spot Price, 2019



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Preliminary Results

• Rapid River—$0.65 to $1.05 per gallon

• Alto—$0.67 to $1.05 per gallon

• Kalkaska—$0.68 to $1.04 per gallon

• Kincheloe—$0.70 to $1.05 per gallon

• Marysville—$0.69 to $0.99 per gallon



https://Marysville$0.69

https://Kincheloe$0.70

https://Kalkaska$0.68

https://Alto$0.67

https://River$0.65

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Next Steps

• Refine assumptions related to Michigan propane supply sources and disposition

• Refine transportation cost calculations

• Match supply alternatives to scenarios

• Assess risks for priority supply alternatives

• Calculate all-in costs for three scenarios

• Estimate impact of changes in supply cost on retail price and demand



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