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 Ju l-0 Ja 5 n06 Ju l-0 Ja 6 n07 Ju l-0 Ja 7 n08 Ju l-0 Ja 8 n09 Ju l-0 Ja 9 n10 Ju l-1 Ja 0 n11 Ju l-1 Ja 1 n12 Ju l-1 2 05 - Ja n- Dollars / Gallon 1.60 16 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 $- -00 - 01 - 02 -03 -04 -05 -06 -07 -08 -09 -10 n n n n n n n n n n n Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja 17 18 7/31/2009 1/31/2009 7/31/2008 1/31/2008 7/31/2007 1/31/2007 7/31/2006 1/31/2006 7/31/2005 1/31/2005 7/31/2004 1/31/2004 7/31/2003 1/31/2003 7/31/2002 1/31/2002 7/31/2001 1/31/2001 7/31/2000 1/31/2000 7/31/1999 1/31/1999 7/31/1998 1/31/1998 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 Ju l-0 7 O ct -0 7 Ja n08 Ap r-0 8 Ju l-0 8 O ct -0 8 Ja n09 Ap r-0 9 Ju l-0 9 O ct -0 9 Ja n10 Ap r-1 0 Ju l-1 0 O ct -1 0 -0 7 Ap r Ja n- 07 0 19 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 $/MMBtu 40.00 35.00 25.00 20.00 15.00 Propane Price 10.00 No. 2 Distillate Price 5.00 29 -0 9 M ay -0 9 M ar n09 Ja 8 -0 ov N Se p08 8 l-0 Ju -0 8 M ay -0 8 M ar n08 Ja 7 -0 ov N Se p07 7 l-0 Ju -0 7 M ay -0 7 M ar n07 0.00 Ja ($/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