Propane industry scrambles to replace supply from major pipeline

Minnesota is losing a pipeline that carries 40 percent of the state's propane, and the fuel industry is scrambling to avoid supply problems next year for an estimated 230,000 homes, farms and businesses that depend on the product.

Propane wholesalers are building or converting fuel terminals to accept deliveries by train instead of by pipeline, expanding propane storage, leasing more tankers and trying to manage a more-complicated supply chain.

"It is a high-priority issue," said Minnesota Commerce Commissioner Mike Rothman, who joined about 40 propane industry executives at a meeting in Gov. Mark Dayton's office last month to discuss the private sector's response to the problem.

Pipeline operator Kinder Morgan will halt propane shipments from Canada next April on its 1,900-mile Cochin pipeline that passes through Minnesota. For 35 years, it has delivered propane, also known as LP gas, to terminals in Benson and near Mankato.

Propane is more than a convenient back-yard barbecue fuel in Minnesota. In large parts of the state not served by natural gas suppliers, homeowners depend on trucked-in propane for heat, and demand is high all winter. Agriculture uses about 30 percent of the state's propane; after a big harvest, demand can spike as farmers dry their corn.

But Canada is producing less propane, and sending less of it down the Cochin pipeline. So its Houston-based operator is spending $260 million to reverse the line's direction. Instead of propane, the pipeline will carry light petroleum condensate from the United States for use by Canada's booming oil industry.

Propane industry officials have been preparing for the switch for a year. The implications became clearer to others this fall when Minnesota farmers struggled to get adequate propane to dry a record corn crop. Industry officials are trying to avoid a repeat of those headaches if harvest-related demand for propane jumps next fall when Cochin is gone.

"There is no propane shortage," said Jason Doyle, president of Alliance Energy Services, based in North Kansas City, Mo., and operator of 75 propane terminals in North America. "We always have plenty of propane, but it is not always in the right places."

Minnesota also gets propane by train and via the Mid-America Pipeline System, from Conway, Kan., to Inver Grove Heights. From terminals, bulk propane is hauled by tank truck to distributors, then to homes, farms and businesses. The Mid-America pipeline owner, Enterprise Products Partners of Houston, hasn't announced plans to expand the line.

That leaves fuel wholesalers looking to railroads to replace the lost Cochin propane. Alliance Energy in September purchased Kinder Morgan's Cochin terminal at Benson for $5 million, and is investing at least $4 million to convert it to handle rail deliveries.

CHS, the nation's largest farmer-owned cooperative and a major wholesaler and retailer of propane, is investing more than $18 million in its regional supply infrastructure and is leasing 400 additional rail tank cars — tripling the size of its fleet — at a cost of more than $5 million a year. The co-op, based in Inver Grove Heights, is adding terminal capacity and storage in Minnesota and North Dakota.

Wayne Transports, a Rosemount-based propane hauler, is hiring drivers and buying 10 more semitrailer tankers to increase its propane fleet by 40 percent. Brad Guggisberg, vice president of sales, said more trucks are needed because they'll haul propane longer distances after Cochin closes.

When the Cochin pipeline stops delivering propane in 2014, the shift to rail will require more planning because trains take longer than pipelines to deliver the fuel. The big tests will come next fall and in the winter of 2014-15.

"It won't be a cakewalk to get through the winter, but I think the industry will be geared up and ready for it," said Roger Leider, executive director of the Minnesota Propane Association, a trade group based in Princeton, Minn. If next fall produces a sudden surge in demand for crop drying, "that will be the biggest challenge," he added.

Drew Combs, CHS vice president for propane, said farmers and homeowners who need frequent fuel deliveries may need to think about adding storage.

"If you go through one tank every week, maybe you ought to think about getting a larger tank for your home," he said.

One concern is that propane prices could rise when rail and trucking increases the cost.

Propane industry leaders aren't blaming Kinder Morgan. As Canadian propane exports have dropped, the pipeline has operated at 22 percent of annual capacity, according to RBN Energy, a Houston research firm. The United States, once a propane importer, is now self-sufficient in the fuel, and exports are rising.

"From a free-enterprise point of view, I can't really argue with them," CHS' Combs said of Kinder Morgan's decision.

Kinder Morgan, which received a presidential permit for the Cochin reversal on Nov. 19, already has done significant work on the project. The reversal requires modifications to valves and pumps on 1,525 miles of the line, and the building of a new storage terminal in Illinois.

Propane shippers are now getting a preview of life after the Cochin pipeline. Kinder Morgan on Nov. 27 temporarily stopped shipments for maintenance. It will resume propane delivery in mid-December, and cease permanently after March.

In July, the line will begin carrying light condensate, also known as diluent, to Canada. It is used to dilute thick oil, or bitumen, extracted from Canadian oil sands. Otherwise, the oil couldn't flow through crude oil pipelines like the proposed 1,179-mile Keystone XL from Alberta to Nebraska.

Cochin will be the second pipeline across Minnesota to carry diluent. The other, owned by Enbridge Energy, was completed in 2010, and like Cochin, cuts diagonally across the state.

Canada has projected a shortage of light condensate next year. Thanks to the U.S. oil and gas boom, light condensate supplies outstrip domestic demand. When Kinder Morgan sought Canadian customers for the reversed line, shippers quickly signed up, taking all available capacity.

"There was a strong market demand for this project," said Karen Kabin, a Kinder Morgan vice president.

David Shaffer • 612-673-7090 Twitter: @ShafferStrib