2013 Propane Market Outlook 1

8/12/2019 2013 Propane Market Outlook 1

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2013PropaneMarketOutlook

Assessment of Key Market Trends,Threats, and Opportunities Facingthe Propane Industry Through 2020

P R E S E N T E D B Y :


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Prepared for the Propane Education &Research Council (PERC) by:

ICF International, Inc.9300 Lee HighwayFairfax, VA 22031Tel (703) 218-2758www.ic.com

Principal Authors:

Mr. Michael Sloan [email protected] Mr. Warren Wilczewski [email protected]

Propane MarketOutlook at a Glance

Total consumer propane sales declined by more than 17percent between 2009 and 2012, including 3.3 percentin 2011 and 10 to 12 percent in 2012. The declinesin 2011 and 2012 were due primarily to much warmerthan normal weather, as well as the impact of higherpropane prices and continuing efciency trends. Salesare expected to rebound in 2013 with a return to moretypical temperatures.

Since 2010, propane prices have fallen substantiallyrelative to other transportation fuels. The average pricedifference between major market marker prices forgasoline (New York Harbor gasoline price) and propane(Mt. Belvieu propane price) has increased by more than$0.76 per gallon, from $0.37 per gallon in 2010 to $1.12per gallon in 2012.

Propane prices are expected to remain very competitivewith gasoline, diesel fuel, and distillate fuel oil as propanesupply continues to increase.

Markets for internal combustion engines offer long termpotential for large growth in propane sales, as cleanpropane applications including commercial lawn mowers,irrigation pumps, and propane vehicles become more

widely available. The residential new construction market remainsdepressed, with new housing starts slowly reboundingfrom their 2009 lows.

Fuel oil conversions in the Northeast may offer the highestgrowth potential in the residential and commercial sectors.

Targeting existing propane customers to maximizehousehold propane applications may be the most efcientway to offset continuing declines in fuel use per customer.

Sales are projected to grow slowly from 2013/2014 to 2020due to a rebound in the economy and introduction of newpropane applications, particularly propane vehicles andother engine applications.

Taking advantage of the opportunities and minimizing thechallenges that lie ahead will require concerted actionby the industry as a whole, including investments in newtechnologies and participation in the national energyconversation.


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The growth in propane supply is projected tocontinue, and the U.S. is expected to be amajor propane supplier to international marketsin the future.

Much of the growth in propane supply isexpected to occur in the Marcellus shale play inthe Northeastern U.S., where ICF anticipates asmuch as 1.8 billion gallons of propane productionper year by 2020, and the Bakken shale play inNorth Dakota, where ICF projects as much as2 billion gallons of propane production per yearby 2020. Supply growth in these and other shaleregions is resulting in a major shift in propanesupply and transportation patterns as well asinfrastructure requirements.

In this report, ICF evaluates the major market factorsdriving propane demand, and reviews the outlook forpropane markets through 2020.

Outlook for Propane Supply andInfrastructure

The U.S. shale gas revolution is having a profoundimpact on propane supply and transportationinfrastructure. The growth in natural gas liquidsproduction from shale gas and tight sands resourcesis rapidly increasing propane production. The propaneindustry recently reached two major milestones due tothe growth in propane supply:

The U.S. became a net exporter of propane, and

Domestic propane production from natural gas liquids(NGLs) exceeded consumer propane demand for therst time.

1 IntroductionIn the last ten years, propane markets have been transformed by the combinedeffects of volatile energy prices, swings in economic outlook, advancements inpropane and competitive technologies, improvements in energy efciency, andchanges in propane supply. While many of these factors have resulted in increasedchallenges for propane marketers, they have also created new opportunities for theindustry. Adapting to these changes and taking advantage of the opportunities willbe one of the dening challenges for the propane industry in the next decade.

2013 Propane Market Outlook 1


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Changes in Propane Pricing Relationships The growth in propane supply is changingfundamental energy price relationships; propaneprices have fallen substantially relative to gasoline,diesel fuel, and home heating oil prices. As a result,propane has become more competitive in the markets

where propane competes against these fuels. Whilepropane prices relative to crude oil are expectedto rebound from 2012 levels as new infrastructure,including new export capacity, is brought on-line, ICFexpects propane prices relative to crude oil to remainwell below historical averages for the foreseeablefuture. At the same time, domestic propane priceswill not fully delink from oil prices, and competitionagainst electricity and natural gas in traditionalpropane markets will remain very challenging.

Outlook for Propane Demand After peaking in 2003, nationwide consumer propane(odorized propane) demand fell by more than 10 percentthrough 2006. Although propane demand reboundedin 2007 and 2008 due to colder weather, propaneconsumption continued to decline in 2009, 2010, 2011,and 2012. (See Figure B)

The collapse of the new housing market and loss ofresidential market share to electricity in many regions,combined with decreases in fuel use per customerresulting from efciency upgrades in homes andequipment, contributed to a decline in residentialpropane sales. The recession also reduced demand inthe industrial and commercial sectors, which have yetto fully recover. The impact of these factors has beenmagnied by increases in retail propane prices, whichpeaked in 2011.

Consumer propane demand fell by 3.3 percent in 2011relative to 2010. The decline was due to much warmerthan normal temperatures during the fourth quarter ofthe year, as well as a continuation of load loss due to

higher prices and improvements in energy efciencyin the residential and commercial sectors. 2012 waseven warmer than 2011, leading to an additionaldecline in consumption of 10 to 12 percent.

Fig.

A Historical Spot Prices

N.Y. HARBOR HEATING OIL

BRENT CRUDE OIL

MT. BELVIEU PROPANE

HENRY HUB NATURAL GAS

0

5

10

15

20

25

30

/ M M B t u

J a n .

0 5

J a n .

1 2

J a n .

1 1

J a n .

1 0

J a n .

0 9

J a n .

0 8

J a n .

0 7

J a n .

0 6

J a n .

1 2

Fig.

B Near-Term Odorized Propane Consumption Forecast

M i l l i o n

G a l l o n s

INDUSTRIAL

INTERNAL COMBUSTION

AGRICU LTURE

RESIDENTIAL

RESELLERS

COMMERCIAL

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

0

2,000

4,000

6,000

12,000

8,000

10,000

Forecast

Source: EIA

2 2013 Propane Market Outlook


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Looking beyond 2012, the outlook is more optimistic.If weather returns closer to normal, propane salesshould increase substantially in 2013. With normaltemperatures, propane sales are projected to start togrow slowly in 2013/2014, and to continue to growthrough 2020. The pace of growth will depend ondevelopment of and growth in the propane engine fuelmarkets. Aggressive growth in engine fuel applicationswill be necessary to offset continuing declines in theresidential sector and other traditional propane markets.

Comparison with Previous Forecasts This report is the third in a series of Propane MarketOutlooks (PMO), which started in 2009. The previousversions of the PMO are available on the PERC Websiteat http://www.propanecouncil.org/about/market-metrics-initiative/ . While the key drivers of propane

demand have been relatively consistent across all of theversions of the PMO, the outlook for propane demandgrowth has changed over time. The current demandforecast is less optimistic than the 2010 forecast. The

rebound in the economy and in the housing market hasbeen slower than projected. In addition, oil and propaneprices have been higher than expected, resulting indecreased demand relative to previous forecasts.

However, recent developments have improved theoutlook for propane use in internal combustionengines. These developments include the availabilityof new emissions-certied engines, widening spreadsbetween propane and conventional fuel prices, andthe growing acceptance of propane vehicles bycommercial vehicle eet operators. With crude oil,gasoline, and diesel fuel prices projected to remain highto the end of the decade, propanes price advantageshould help drive continuing growth in the engine fuelsegment. ICF is projecting propane vehicle sales toincrease from fewer than 5,000 in 2011 to more than40,000 per year by 2020, with the potential for much

higher growth depending on national energy policyand the rate at which the propane industry choses todevelop propane refueling infrastructure and promotepropane vehicle sales.



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2.1

Changes in Propane SupplyIn recent years, a sea-change has taken place inNorth American propane supply. Three years ago, thepropane market relied on imports to meet domesticdemand. Today, domestic production exceeds demand,with exports rising as quickly as capacity will allow.

Between 2005 and 2011, U.S. production of propanefrom natural gas processing plants and reneries grewfrom 12.4 billion gallons to 13.8 billion gallons (SeeFigure C). The primary driver of this expanding supplyhas been the growth in propane production fromdomestic natural gas liquids, which increased from 7.7billion gallons in 2005 (the lowest level since 1991) to9.7 billion gallons in 2011. In 2012, the U.S. producedabout 15 billion gallons of propane, including almost 11billion gallons of propane from natural gas liquids.

This dramatic increase in production from gas processingplants has had a powerful impact on Americas propanebalance of trade. In 2005 the U.S. imported morethan 20 percent of its total propane supply, includingnearly 1.2 billion gallons of propane from outside North

America, and an additional 2 billion gallons from Canada.By 2011, imports from outside North America declinedto just over 300 million gallons, while imports fromCanada declined to 1.5 billion gallons. However, the

Fig.

C U.S. Historical and Forecasted Propane Supply

U.S. REFINERY NET PRODUCTION OF PROPANE

U.S. PROPANE IMPORTS

U.S. GAS PLANT PRODUCTION OF PROPANE

Forecast

0

2,000

4,000

6,000

20,000

18,000

14,000

16,000

12,000

8,000

10,000

M i l l i o n

G a l l o n s o

f P r o p a n e

S u p p l i e d p e r Y e a r

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 8

2 0 1 9

2 0 2 0

Sources: EIA, U.S. Department of Commerce, ICF

2 Critical Energy Market TrendsThe U.S. propane industry is facing several fundamental changes in energy markets overthe next few years. Growth in propane supply, volatile energy prices, evolving energy andenvironmental policies and regulations, and increased competition with electricity will all havemajor impacts on propanes competitive position.



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U.S. also exported 1.9 billion gallons, and became a netexporter of propane. In 2012, exports of propane grewsubstantially to about 2.6 billion gallons, leading to netexports of almost 1.0 billion gallons.

The changing supply picture has ipped propanesperceived place in the fuels basket. Long seen as acrude oil derivative, with the same supply security issuesas other petroleum products, more than 70 percent oftotal U.S. propane supply now comes from domesticnatural gas liquids production. In 2012, propaneproduced in the U.S. from domestic natural gas liquidsand crude oil resources exceeded total consumerpropane demand. Imports from outside the U.S. andCanada made up only about one percent of total supply,and about 11 percent of propane was produced in U.S.reneries from non-U.S. or Canadian crude oil. The U.S.exported about 15 percent of total propane supply.

ICF projects that these trends will continue. The outlookfor renery-supplied propane remains negative dueto additional renery shutdowns, the reorientation ofothers to focus on diesel and distillate production, andcontinued renery emphasis on producing propyleneinstead of propane. ICF is projecting North Americanproduction of propane in association with natural gasliquids to increase from 13.4 billion gallons per year in2012 to 15.6 billion gallons a year in 2015 and 18.1billion gallons per year by 2020.

This increasingly positive outlook for domestic propanesupply is primarily due to the continuing developmentof shale gas and unconventional oil resources. Theincrease in propane production from natural gas

liquids has also accelerated due to the shift in resourcedevelopment activity from dry natural gas resources towet gas and liquids resources.

Most of the new propane production is expected togo to markets other than U.S. consumer demand. Aspropane prices have fallen, petrochemical industrydemand for propane has increased. The petrochemicalindustry is planning to signicantly expand propaneuse in the future. Recently announced plans for newpropane to propylene petrochemical facilities suggestthat, by 2018, propane consumption in new facilitiescould increase petrochemical propane demand by anadditional 2.3 billion gallons per year.

In addition, midstream companies, includingEnterprise, Targa, Vitol, Phillips 66, and others haveproposed development of new export capacity to meet

demand in international markets with higher propaneprices. The list on the following page shows someof the recently announced propane/butane exportterminals, which, if all commissioned, would increasepropane export nameplate capacity from 2.9 billiongallons per year in 2012 to as much as 16.8 billiongallons per year by 2018.

While today, most U.S. propane exports go to marketsin Central and South America, much of the new capacityis slated to available by 2015, when the Panama Canalexpansion project is scheduled for completion, allowing

Gulf Coast terminals easier access to the Asian market.

Despite the growth in petrochemical propane demand,propane exports are expected to continue to increase

Existing and Publicly Announced Planned Propane Dehydrogenation Plants

CompanyOutput Volume

(tons/yr)Propane Consumption

(Mil. Gal./yr.) Location Start-up Year

PetroLogistics 640,000 460 Houston, TX 2010

PetroLogistics 640,000 460 Houston, TX 2014

Dow Chemical 750,000 540 Freeport, TX 2015

Enterprise 685,000 490 Chambers Co., TX 2015

C3 Petrochemicals N/A N/A Alvin, TX 2015

Williams 500,000 360 Edmonton, AB 2016

Formosa Plastics 800,000 570 Point Comfort, TX 2016

Dow Chemical 550,000 380 TX/LA 2018

Total 4.6 million 3,260



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for the next few years. Figure D at left shows bothhistorical and projected propane import/export balance.Exports are expected to increase to more than 4billion gallons per year by 2015, before stabilizing asnew petrochemical demand offsets growth in propaneproduction. The net balance is the result of shifting

domestic propane production, as well as historicaland projected demand from consumer and industrialmarkets. Imports from Canada will remain relativelystable as Canadian production of propane stabilizesafter several years of decline. The U.S. will continueto import marginal quantities of propane from othercountries into specic markets, including New Englanddue to occasional supply shortfalls.

2.2

Energy PricesWorld Oil Prices

Oil prices represent one of the greatest areas ofuncertainty affecting the outlook for propane. Oil pricesincreased rapidly from 2001 to 2008, driving up propaneprices and reducing propanes competitiveness inmany markets. Although negative economic conditionsreduced oil demand and caused prices to fall back to2005 levels during 2009, crude oil prices moved back

Existing and Proposed LPG Export Terminals

Company LPG Export Capacity (Mil. Gal./yr.) Location Start-up Year

IN OPERATION ON JAN. 1. 2013

Enterprise 2,076 Houston Ship Channel, TX

Targa 756 Galena Park, TX

Other 29 Miami, Norfolk, NY, Seattle, LA Total in Operations in 01/2013 2,851

PROPOSED

Enteprise 1,750 Houston Ship Channel, TX 2013 Q1

Targa 1,850 Galena Park, TX 2013 Q3

Vitol 1,500 Beaumont, TX 2014 Q4

Phillips 66* 6,500 Baytown, TX 2014

Sunoco Logistics 600 Marcus Hook, PA 2014 Q3

Pembina Pipeline Co. 600 Prince Rupert, BC (Canada) 2015 Q3

Occidental 1,150 Corpus Christi, TX 2017Total Proposed 13,950

Total in Operation + Proposed 16,800 By 2017

* Project unlikely to proceed.

Fig.

D U.S. Propane Export Projection to 2020

M i l l i o n s o

f G a l l o n s

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 2 0

2 0 1 0

2 0 1 2

2 0 1 4

2 0 1 6

2 0 1 8

TOTAL EXPORTS

CANADIAN IMPORTS

N0N-CANADIAN IMPORTS

6,000

4,000

2,000

0

6,000

4,000

2,000

Forecast

Net Exports

T o t a l I m p o r t s

T o t a l E x p o r t s

Sources: U.S. Department of Commerce, ICF



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propane spot prices at Mt. Belvieu 1 were 43 percentbelow the Brent 2 crude oil price when measured indollars per MMbtu. This represents a signicant declinerelative to 2010, when propane prices were only 8percent below the cost of Brent crude oil on a dollar perMMBtu basis. The impact on propane price of rapidlyexpanding supply and a declining consumer market,particularly due to the 2011/2012 non-winter, waspronounced. 3 Propane prices declined from $1.56 pergallon in September 2011 to below $0.80 per gallon inJuly of 2012 before rebounding to between $0.80 and$1.00 per gallon during the second half of the year.

At the same time, the price of distillate fuel oil generally

has been increasing relative to crude oil. The change inthe relative fuel prices of both propane and distillate is amajor shift away from the historic norms for both fuels.

above $100 per barrel in 2011. Long term internationaldemand for oil is expected to continue to increase,maintaining upward pressure on oil and petroleumproduct prices, as well as propane prices.

World oil prices are also expected to remain highlyvolatile. Much of the recent increase in crude oil priceshas been the result of a signicant risk premium addedto market prices due to political instability in the MiddleEast and North Africa. Further instability in theseregions likely would result in even higher oil prices andpotentially dramatic price spikes.

In the past, propane prices have been very closely linkedto oil prices in both domestic and international markets.

This relationship is changing, but not disappearing,due to the growth in domestic propane supply. In2012, high propane inventories due to warm winterweather, combined with growth in propane supply andconstraints on propane export capacity pushed propaneprices down to historically low levels relative to crudeoil. As propane export capacity catches up to supply,domestic propane prices are expected to rebound.However, the change from an importer to an exporterof propane has shifted the fundamental relationshipbetween domestic propane and crude oil prices.

In the future, we anticipate the ceiling on domesticpropane prices will be set at the world price of propane minus transportation costs to international markets,rather than the world price of propane plus transportationcosts that set the oor on domestic propane pricesduring the periods when the U.S. was a major propaneimporter. In addition, the growth in U.S. exports, as wellas growth in other international sources of propane islikely to put downward pressure on international propaneprices relative to crude oil.

Petroleum Product PricesOil price volatility has carried over to petroleum productprices, including gasoline, heating oil, and ultra lowsulfur diesel (ULSD).

While the price relationship between propane and crudetends to change from month to month, average 2012

1 Mt. Belvieu is the largest propane storage facility in the U.S., and prices at Mt. Belvieu are generally accepted as the market price for propane. Regionalpropane prices will differ from Mt. Belvieu based on transportation costs and transportation constraints.

2 The price of Brent crude is curren tly considered a marker price for world crude oil. Prices of other crude oils, inc luding WTI (West Texas Intermediate) aregenerally linked to world crude oil prices based on transportation cost differences and differences in crude oil quality. In the past, WTI has been a marker price forcrude. However, in the past two to three years, transportation infrastructure constraints have suppressed WTI prices relative to Brent and other crude oil prices.

3 During the 2011/2012 winter, the U.S. experienced 16% fewer heating degree days than during a normal winter.

Fig.

E Propane, Heating Oil, ULSD, and Gasoline Wholesale Prices

N.Y. HARBOR GASOLINE NY HARBOR HEATING OIL

NY HARBOR ULSD MT. BELVIEU PROPANE

W h o l e s a l e F u e l P r i c e (

p e r M M B t u )

$0

$10

$15

$20

$25

$30

J a n .

0 9

J a n .

1 5

J a n .

1 4

J u l .

0 9

J a n .

1 0

J u l .

1 0

J a n .

1 1

J u l .

1 1

J a n .

1 2

J u l .

1 2

J u l .

1 4

J a n .

1 3

J u l .

1 3

Futures Prices

as of March 8, 2013

Sources: EIA, NYMEX



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The underlying trends in distillate fuel oil prices aredetermined by the international market. The economicslowdown reduced distillate demand and prices in theshort term; however, international distillate demand isexpected to grow, pushed higher by policies and taxespromoting the use of diesel. At the same time, the costof distillate production is expected to increase due totightening international environmental standards onsulfur content and changes in the international crude oilsupply mix.

In addition, growth in worldwide propane supply isexpected to exceed growth in non-petrochemicalpropane demand as major processing facilities comeonline in Qatar and other propane producing countries.

These shifts in supply and demand indicate that distillateprices are likely to continue to remain high relative topropane prices over the next few years. As a result,

propane is expected to remain very competitive withboth diesel fuel and distillate fuel oil in U.S. markets.

In 2012, Mt. Belvieu propane prices averaged 43percent of the price of Brent crude oil on a dollar perMMBtu basis, down from 8 percent below Brent in2010 and 18 percent below Brent in 2011. During thesame period, No. 2 Heating Oil maintained a relativelyconsistent premium of about 10 percent above Brent.

This shift resulted in an increase in the wholesale priceof fuel oil relative to propane of about $8.30 per MMBtu,or about $0.76 per gallon of propane.

This market shift is reected in the current futuresmarkets for both propane and fuel oil. The NYMEXfutures market currently indicates that the participantsin the market expect propane prices to rebound slowlyrelative to crude oil, while the price of distillate fuel oilis expected to continue to increase relative to crudeoil. Overall, the futures market indicates a market

expectation that the differential between wholesale fueloil and wholesale propane prices is expected to remainat historical highs through 2014.

This shift has also affected the relationship betweenpropane and gasoline prices. Since 2010, the averageprice difference between major market marker prices forgasoline (New York Harbor gasoline price) and propane(Mt. Belvieu propane price) has increased by more than$0.76 per gallon, from $0.37 per gallon in 2010 to $1.12per gallon in 2012.

At todays prices, propane is extremely attractiverelative to gasoline and diesel fuel in many engine fuelapplications. ICF projects the difference betweenthe prices of gasoline and diesel fuel and propaneprices to decline slowly over time relative to todayslevels, as markets continue to adjust to the growth

in supply, leading to a continuation of the attractiveeconomics for propane engine fuel applications for theforeseeable future.

Electricity Prices

In most residential and commercial markets, competitionwith electricity will continue to be a major challengeto growth in propane sales. Over the past 10 years,propane prices have increased relative to electricityprices in most geographic markets. However, electricityprices have also increased, dramatically in some areas.

Electricity prices vary widely by region dependingon market structure, generation types, and capacityconstraints. The characteristics of electricity productionlead to retail electricity prices that are generally morestable than those of other fuels. Hence, when energyprices are increasing, prices of other fuels can beexpected to increase faster than electricity prices.

LPG Carrier Yuyo, photo courtesy of JX-Shipping of Tokyo, Japan



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The price of electric ity also varies widely by speciclocation. State average prices reect the major factorsdriving prices in the state, but tend to be representativeof the prices charged by utilities serving the majorurban areas with the majority of electricity customers.Electricity prices in rural and suburban areas can divergesubstantially from these state averages. Within aspecic state, some markets are likely to see electricityprices as much as 40 percent higher or lower thanthe state average, with the higher prices often set bysmall municipal utilities that serve areas with a highconcentration of propane customers. As a result,

propane can be competitive with electricity in manycommunities even in states with relatively low averageelectricity prices.

Electricity prices are expected to rise slowly from theircurrent levels in many states. However, ICF does notexpect to see signicant near-term improvement in therelationship between propane and electricity prices inany major market, and the softness in natural gas prices

is beginning to translate into lower electricity prices incertain higher-cost markets such as New England andthe Northeastern United States. In the longer term,increases in power generation investmestments relatedto implementation of emissions regulations is expectedto lead to a slow increase in future electricity prices,but no fundamental impact on the competitive costrelationship between propane and electricity should beexpected before 2020.

Near Term Residential Energy Price Outlook

The Energy Information Administrations (EIA) short-termresidential energy price forecast, from January 2013,projects fuel oil prices to continue increasing fromcurrent levels through the end of 2013. While the EIAno longer projects residential propane prices, ICFestimates a steady decline from the peak prices in2011. The EIA expects residential natural gas prices torebound slightly from the lows of 2012, while electricityprices increase slowly (see Figure G).

Average Price

below 10

10.0011.00

11.0112.00

12.0115.00

15.0037.3

Average Change

decrease

0%1.99% increase

2.00%3.99%

4.00%5.99%

6.00% or greater increase

17.6(8.1%)

Source: US DOE EIA (2012 Data are Preliminary)

11.3(2.0%)

11.6(-6.1%)

15.2(3.3%)

11.1(0.9%)

11.3(-2.8%)

11.8(2.5%)

11.4(1.1%)

11.3

(5.9%)

11.1(9.9%)

11.7(2.0%)

11.1(6.0%)

18.3(-2.3%)

15.4

(-1.9%)


Fig.

F 2012 U.S. Residential Average Price (and change from 2011) per Kilowatthour2012 U.S. Average Price: 11.80/kWhAverage change 20112012: 2.25%


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2.3

Competition with Electricityand Other Fuels

Propanes share of the residential space heating markethas been falling since 2007. Much of the loss inpropane market share in the residential sector in recentyears is attributable to competition with conventionalelectric heat pumps. This competition is expected tointensify over time for several reasons. Technologyimprovements are reducing heat pumps traditionalshortcomings. New generation heat pumps are muchmore efcient than older units. In addition to improvedoperating characteristics at low temperatures, the heatoutput from new heat pumps has increased, improvingthe comfort they deliver. Equipment reliability andlifespan also have been improved. As heat pumptechnology continues to advance, it will remain agrowing threat to the propane heating market.

Geothermal heat pumps (GHPs) represent a growingcompetitive challenge to propane in some key regionalheating markets where conventional heat pumpstraditionally have not been able to compete effectively with

propane. GHPs are designed to maintain high operatingefciency even when outside temperatures drop below20 degrees Fahrenheit, which allows the technology to becompetitive in colder environments where the conventionalheat pump is unable to operate economically.

Until recently, market adoption of GHP technology waslimited by the very high cost of installation. However,GHPs are now being aggressively marketed as a greentechnology and are currently eligible for a 30 percentincome tax credit on the full installation cost. The U.S.Department of Agriculture also provides funding forrural electric cooperatives to install ground loops forGHP systems, with the costs recovered through a utilityrate surcharge to the customer. These incentives haveprovided a signicant boost to GHP installations in thepast few years, and are expected to stimulate additionalgrowth in GHP installations in the future.

The map in Figure H shows the fuel type with the largestincrease in market share between 2009 and 2011 foreach county. Overall, electricitys share of the homeheating market has been increasing rapidly, particularly inthe South, but also in some northern states. The shareof homes heated with wood has also been increasing inthe last few years, particularly in New England and theupper Midwest. Many of these homes switched frompropane and fuel oil to wood due to increased fuel prices.ICF believes that most of the homes that switched to

wood from propane can heat with either energy sourceand can switch back to propane if consumers tire ofusing wood or if propane prices moderate.

Propane gained market share in 1,128, or 36% of U.S.counties between 2009 and 2011. Much of the growth inmarket share occurred in counties where fuel oil marketshare declined. However, in a surprising number ofcounties (see map in Figure I), propane increased marketshare at the same time that natural gas market share wasdeclining. In these counties, the propane market wasincreasing due to new housing growth and conversionsfrom other fuels, while the natural gas system was notexpanding, or was losing share to electricity.

This trend is unlikely to continue as natural gasutilities, often supported by natural gas regulators andconsumer advocates, use lower natural gas prices to

justify expansion of natural gas distribution systems toadditional consumers.

Fig.

G U.S. Average Residential Prices

HEATING OIL

NATURAL GAS

$ / M M B t u

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

ELECTRICITY

PROPANE

0

5

10

15

20

25

30

40

35

C e n t s p e r K

i l o w a t t h o u r

0

12

10

6

2

4

8

ICF Estimate

-15.12%

+72.12%

+46.85%

+24.76%

Change 20062012

P r o j e c t e d



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Fig.

H Fuel with Largest Market Share Gains between 2009 and 2011

Propane

Natural Gas

Electricity

Distillate

Wood

Fig.

I Fuel with Largest Market Share Losses between 2009 and 2011 in Counties where Propane Gained Market Share

Natural Gas

Electricity

Distillate

Wood



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In more than 71% of the 2,012 counties where propanelost market share between 2009 and 2011, electricitywas the fastest growing residential space heatingfuel (see map in Figure J above). Much of the loss inmarket share to electricity has occurred in regions of thecountry, including the Midwest and Southeast, whereelectricity supply is dominated by coal-red powergeneration. These regions are subject to increases inelectricity prices due to increasing costs of coal powergeneration associated with more stringent environmentalregulations. While these cost increases are unlikely tochange the market dynamic in the short term, higherelectricity costs after 2015 likely will slow down propanecustomer losses in these regions.

2.4

Energy PolicyNational energy policies, such as alternative fuel andenergy efciency tax credits, make propane applicationsmore attractive in the marketplace. However, thesepolicies are also likely to increase the energy efciencyof propane applications, accelerating a long term

trend that is reducing propane sales per applicationrelative to existing equipment. New energy policies andregulations also have the potential to tilt the playing eldin favor of electricity or other fuels in certain applications.

Building and Equipment Efciency Standards

Existing equipment efciency standards and buildingcodes have driven a long term decline in averagepropane sales per customer in the residential andcommercial sectors, directly impacting propane salesto both new and existing propane customers. Theyalso promote technological improvements in competingtechnologies, such as heat pumps.

In 2011, the U.S. Department of Energy nalized rulesto increase minimum propane furnace efciency from78 percent to 90 percent starting in May 2013 for the30 northern region states that normally experience morethan 5,000 annual heating degree days. This includesthe states with most of the existing propane heatingload. Tightening of energy efciency standards andbuilding codes would have a signicant impact on theeconomics and energy use in these applications, and

Fig.

J Fuel with Largest Market Share Growth between 2009 and 2011 in Counties where Propane Lost Market Share

Natural Gas

Electricity

Distillate

Wood



15/28

would be expected to accelerate the recent declinein propane use per customer for residential heatingcustomers. However, legal challenges to this rule havedelayed implementation. 4 Even with the delay in theimplementation of the new standards, existing standardsare expected to result in a continuing decline in averagepropane use per residential customer of around onepercent per year.

The national policy focus on energy issues,including energy security, energy efciency,and emissions, is likely to result in greaterpromotion of high-efciency electricappliances. The propane industry can expectto see signicant expansion in the number

of utility-sponsored programs that provideincentives for high-efciency conventionalheat pumps and GHPs, and high-efciency100 percent electric homes in many regionsof the country.

Alternative Motor Fuel and Infrastructure Tax Credits

The federal alternative fuel excise tax credit providesa signicant nancial incentive for the use of propaneas a motor vehicle fuel. This tax credit of $0.50per gallon expired at the end of 2011, but was

retroactively extended to apply to propane used tooperate propane-powered vehicles through December31, 2013. The federal alternative fuel infrastructuretax credit was also reinstated in January 2013 andprovides up to 30 percent of the cost of a qualiedpropane refueling facility, not to exceed $30,000,through the end of 2013. Currently these tax creditsare subject to renewal every year.

The propane industry is promoting the Propane Gas Act to extend these fuel tax credits through 2016, butthe future of this proposal remains uncertain. Thebiofuel, electric, and natural gas industries are alsoaggressively pursuing these markets, and can beexpected to substantially outspend the propane industryon vehicle development, marketing, and lobbying.Without aggressive industry support, future changes infederal and state energy policies may favor these otheralternative fuels relative to propane. Long term stabilityof the tax credits would improve market acceptanceof propane vehicles, leading to an increase inthe ICF forecast of propanevehicle sales.

4 In January, 2013, the U.S. DOE proposed delaying implementat ion of these standard in response to the legal challenges. Approval of this proposal likely willdelay implementation of the new standards for several years.

Fig.

K New Propane Heated Households

N e w

H o m e s

S t a r t e d

/ M o b

i l e H o m e s P l a c e d ( T h o u s a n d s )

SITE-BUILT HOMES MANUFACTURED HOMES

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

0

20

40

60

140

80

100

120 Forecast

Source: U.S. Census Bureau, Survey of Construction 2000 - 2011, American Housing Survey, American Community Survey, ICF Estimates



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Residential Demand Outlook

Under steady-price conditions, the long term trendtoward increased energy efciency is expected to resultin a continued decline in average propane sales perresidential customer at an average of about one percentper year. Dramatic rises in heating fuel prices, suchas those experienced in 2008 and 2011, acceleratethis trend, driving efciency gains at as much as twicethe long term trend rate. Declines in prices, such asthose experienced in 2012, slow down improvements inefciency in the short term, but do not affect the longerterm trend. Adding new residential customers throughnew construction represents one approach to offsettingthe losses in load due to efciency improvements.However, the residential new construction marketremains depressed, with new housing starts only slowlyrebounding from their 2009 lows. As such, housingstarts are unlikely to reach recent housing boomlevels in the foreseeable future, and we anticipate thatimprovements in efciency will more than offset growthfrom new construction.

Part of the downturn in housing starts has been offsetby modest growth in propane cooking and waterheating markets. Maintaining and growing share inthese markets will help position propane to capitalize onan eventual rebound in new construction.

3.1

Residential MarketsResidential demand represents almost 60 percent oftotal consumer propane sales. The residential sectoris highly regional and market specic. Even thoughthe propane industry added more than one millionnew residential propane heating customers through

new construction and new manufactured housingplacements between 2000 and 2011, the total numberof propane heated manufactured homes has beendeclining since 2001, and the total number of site-builtheating customers has been declining since 2005.

Growth in the Northeast is offset by losses in theSouth, while growth in the propane market share innew site-built housing construction has been offset bylosses in manufactured housing. In addition, averageresidential propane demand per customer has beendeclining due to improvements in energy efciencyand conservation.

The decline in the number of space heatingcustomers, combined with improvements in efciencyand declining use per customer has resulted in asignicant long term decline in propane sales in theresidential sector (see Figure L).

3 Overview of Key Propane Markets



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Overall, residential propane demand is expectedto rebound in 2013 due to a return to more normalweather. Thereafter, demand is expected to fallslowly through 2015 as any growth resulting from thestart of the economic recovery is offset by continueddecreases in consumption due to efciency gains. After2015, residential demand is expected to continue tofall slowly. However, demand will depend largely onpropane consumer price trends and the competitionwith electricity.

Opportunities in the Residential Sector

Propane remains a premium fuel in the largest andmost expensive new homes that are not on the naturalgas main. Owners of custom and upscale homesbuilt off the gas main want the convenience of gas forcooking, heating, and other needs. These customersbase their heating and appliance decisions on valuerather than cost, and the propane industry haseffectively promoted the value of propane throughoutthe range of residential applications.

Fig.

L Residential Propane Demand Forecast by End Use

0

2,000

4,000

5,000

3,000

1,000

6,000

M i l l i o n

G a l l o n s

COOKING/OTHER APPLICATIONS

MANUFACTURED HOUSING

SEASONAL HOUSING

PRIMARY SPACE HEATING

WATER HEATING

SUPPLEMENTARY SPACE HEATING

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

Forecast



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Even in the southern sections of the country, wherepropane heating market share has been declining,propane cooking and water heating have beenincreasing, as the more upscale residences in theseregions continue to demand the convenience andcomfort of gas for these applications.

However, the recent increase in propane prices,combined with an increased sensitivity to rst-costissues in the homes that have been built, resulted in anoticeable decline in propane space heating marketshare in new construction in 2010 and 2011.

Existing customers represent a signicant potentialmarket for new propane applications. For example,many customers use propane for cooking, waterheating, or clothes drying, but not for space heating.Other customers use propane for space heating, but

not for water heating or cooking. More than 2.5 millionexisting propane customers could convert to propaneheat, including more than 1 million customers in theNortheast who are likely heating with fuel oil. Almost 4million existing propane customers do not heat waterwith propane, and almost 4 million existing propanecustomers do not cook with propane. Increasingthe number of propane applications used by existingpropane customers may be the most efcient way tooffset declines in use per customer from improvementsin energy efciency.

3.2

Commercial Sector Outlook The commercial sector accounts for about 20 percentof the overall consumer propane market. The near termforecast for propane demand shows stable non-weatherdriven consumption in the commercial sector through2012, with the impact of modest economic growthoffset by the long term impacts of higher propaneprices. Weather-sensitive demand declined in 2011and 2012 due to warmer than normal temperatures,

but is expected to rebound in 2013. This is followedby very modest growth in 2013 through 2015 linked toa rebounding economy. In the longer term, projectedgrowth in commercial propane sales will be driven bygrowth in commercial activity.

The commercial sector is a very diverse market, with amuch wider range of customer types and end-uses thanother sectors. The market also differs widely by region

Fig.

M Propane Space Heating Market Share in Commercial Markets

Buildings (Thousands)

Other

Warehouse and Storage

Service

Religious Worship

Public Assembly

Office

Retail Other than Mall

Lodging

Health Care

Food Service

Education

0 4020 60 10080

10%

47,911

92,406

50,648

36,893

38,611

47,088

23,991

14,086

51,996

55,692

42,605 11%

8%

15%

14%

13%

5%

11%

20%

9%

17%

TOTAL PROPANE BUILDINGS:501,927 PROPANE MARKET SHARE:10.8%

Fig.

N Propane & Fuel Oil Use: All Applications

B u

i l d

i n g s ( T h o u s a n d s )

FUEL OIL PROPANE

N o r t h

e a s t

W e s t

S o u t h

M i d w e

s t0

50

100

300

150

200

250



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in a manner similar to the residential sector. RecentPERC research into the commercial sector indicatesthat there is signicant opportunity to expand sales intothis market. Understanding the regional differences infuel use and the variety of commercial propane marketsegments (e.g., schools, fast food restaurants, andhouses of worship) can lead to new opportunities.

One of the key applications - and region-specicopportunities - in the commercial sector will be conversionof fuel oil heating customers. Fuel oil currently dominatesthe commercial heating market in the Northeast. Manypotential propane heating customers already use propanefor cooking and other purposes, presenting the propaneindustry with near term conversion opportunities withexisting propane customers. The market share for fueloil in new commercial construction has already declinedsubstantially because of permitting issues with fuel oil

storage tanks, leading to additional market opportunitiesfor propane in new commercial construction. While fueloil use is not as predominant in the Midwest and Westernregions, there remain signicant pockets of fuel oil usein the commercial sector in these regions that provideopportunities for propane.

Other key opportunities include promotion of tanklesswater heaters in a variety of commercial segments,including the lodging and resort industry, and ininstitutional and educational settings. In the commercialsector, tankless water heating can have both rst cost

and operating cost advantages relative to electric waterheating when electric system cost savings and buildingspace savings are fully accounted for.

3.3

Internal Combustion Engine Outlook The internal combustion engine market offers longterm potential for large growth in propane sales. ICF isprojecting propane sales in this market area to doublefrom about 600 million gallons in 2011 to almost 1.2

billion gallons in 2020. In the short term, a steeprecession-driven decline in propane use in the forkliftmarket could be partially offset by modest growth indemand for on-road vehicles, commercial mowers,and stationary engines. The increase in vehicles andapplications available to the market, combined with animprovement in the propane/gasoline price relationshipand an economic recovery, should lead to modestdemand growth in 2012 through 2013 (see Figure O).

After 2013, growth in new applications has the potentialto signicantly expand propane sales, particularly in theon-road vehicle and mower markets.

On-Road Vehicles

Propane provides a viable alternative to gasoline anddiesel fuel in the on-road vehicle market, and hassignicant environmental advantages relative to both. Inaddition, recent changes in the long term relationshipbetween propane and both gasoline and distillate fuelprices has positioned propane as a potential lower costalternative to both gasoline and diesel powered vehicles.

In the past few years, propane vehicle sales have been

constrained by the limited number of new propanevehicles and aftermarket vehicle conversion systemsavailable to the market. Recent investments by PERC,ROUSH CleanTech, Bluebird Bus, CleanFUEL USA,and others have lead to the introduction of a number ofnew propane-powered vehicles in the last three years.Industry partnerships with additional original equipmentmanufacturers (OEMs), including the existing PERCpartnership with Freightliner Custom Chassis, have

Fig.

O Internal Combustion Engine Propane Consumption

0

600

1000

800

400

200

1200

M i l l i o n

G a l l o n s

DIESEL INJECTION

ON-ROAD VEHICLES

NON-ROAD ENGINES

FORKLIFTS

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

Forecast



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the potential to rapidly expand the number of vehiclesavailable to the market in the longer term (see Figure P).

The recent introduction of a series of new propane-powered vehicles is expected to generate a near termincrease in propane sales in this market. However,the propane industry will need to overcome signicantmarket hurdles to maximize sales in this sector.

In the past, much of the alternative fuel market has beendriven by customer preferences to be seen as green, aswell as the need to comply with alternative fuel objectivesrather than for cost or performance reasons. In addition,much of the alternative fuel market has been sustainedby vehicle5 and fuel tax incentives. While this has helpedpropane in the past, the current emphasis on electricand natural gas vehicles in the national policy debateincreases the potential to leave propane out of the

alternative fuel conversation in the future. However, giventhe current disparity between propane and gasoline/ diesel prices, propane vehicles make sense on a straighteconomic basis in many applications, including schoolbuses, shuttles and taxis, delivery vehicle eets, lawenforcement eets, and other eet vehicle applicationswhere vehicles are based at a single location.

To accelerate penetration of propane into the on-roadvehicle market, the industry needs to help increase thenumber of vehicles available and encourage the longterm extension of tax credits on equipment capital and

fuel costs that are scheduled to expire at the end of2013. Additional efforts should focus on educatingconsumers on the economic and environmental benetsof propane vehicles, reducing the regulatory burden forsmall, low-volume manufacturers and converters, andensuring recognition of propanes environmental andenergy security benets in the national environmentalpolicy debate.

Forklifts

The forklift market is a key market for the propane

industry, representing about ve percent of totalodorized propane sales. However, unless the forkliftindustry is able to develop a new generation of propaneforklifts with lower operating costs and better emissionscharacteristics than the currently available models, and

is able to market the new generation of propane lifttrucks at a competitive price, ICF projects that propanesales to the forklift market will decline slowly for theforeseeable future.

The recent recession caused a substantial decline inthe overall size of the forklift market. In addition, thecombination of fuel price and technology changeshas resulted in a loss of propane market share in thismarket. While demand for new lift trucks experiencedhealthy growth in 2011, the propane share of new forkliftsales declined. Before the recent recession, propaneforklifts represented more than 60 percent of the marketfor class four and ve lift trucks. In 2011, the propanemarketshare fell to less than 50 percent of the market.

Electric lift trucks represent the primary threat to propanein this market. The electric battery, battery charger, and

motor technologies incorporated into electric lift truckshave continued to improve over time. In addition, theincrease in the cost of propane relative to electricityhas increased the expected operating costs of propaneforklifts relative to their electric competitors.

5 Tax credits fo r the purchase of propane vehicles expired at the end of 2011, and have not been renewed.

Fig.

P Projected Propane On-Road Vehicle Sales

Forecast

0

5

45

10

15

25

30

35

40

20

N e w

V e h

i c l e s p e r Y e a r ( T h o u s a n d s )

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0



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Propane mowers burn cleaner and result in feweremissions over competing gasoline-red equipmentand should have a longer effective equipment life andbe less costly to maintain. In most regions, fuel costsare also likely to be lower with propane. However,propane mowers currently available cost considerablymore to purchase than comparable gasoline equipment.In addition, there is a signicant structural cost tocommercial customers of switching from gasoline topropane. Switching requires changes in refueling andservicing practices, as well as employee and servicepersonnel training practices. Maintaining a eet usingtwo different fuels at the same time also increasescosts, while the cost of replacing an entire eet ofmowers at one time is likely to be prohibitive to manypotential customers.

Other Non-Road Engines

The non-road engine market provides large growthopportunities for the propane industry, although cost,regulatory, and market structure issues must beresolved to reach this markets full potential. Basedon technology available today, three applications are

especially promising:

Commercial Lawn Mowers: The commercial propanemower market has the potential to generate signicantgrowth in propane demand, possibly rivaling propaneforklifts as the largest market for propane engines.Currently, there are about one million commercial lawnmowers in service, with the potential to consume morethan one billion gallons of propane. More than 12 OEMshave already brought propane mowers into the market.



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market in the next two years. These units should bequieter and cleaner, and have lower maintenance costsrelative to competing gasoline and diesel fuel options,and appear likely to be offered at similar price points.

These units should be competitive in the backup powergeneration market, and could be used for electricitypeak shaving in some markets with particularly hightime-of-use electricity rates. In addition, the propaneindustry appears well situated to generate signicantnew propane sales in the towable generator market dueto increased costs of diesel generation associated withnew emissions regulations on diesel engines.

Diesel Fuel Displacement

Changes in diesel fuel prices relative to propane, as wellas increases in diesel engine costs necessary to meetmore stringent environmental regulations, provide thepropane industry with a major opportunity to displacediesel fuel use in a wide variety of different applications.

The potential size of these markets is astounding.Current diesel fuel consumption in the U.S. is theequivalent of 80 billion gallons of propane.

The propane industry has a number of applicationsavailable today capable of competing with dieselengines, including several of propane vehicles, propaneirrigation engines, and portable power generationapplications. Other applications, including the dieselco-injection technologies, are nearing market availability.However, there are currently large sections of thediesel market where no viable propane alternative isavailable or under development. Identifying the mostattractive markets and applications, and developing theapplications needed to serve these markets, will be animportant step in growing propane markets in the nextfew years.

As a result, the distribution and servicing structure forpropane mowers has developed at a slower pace thanthe technologies themselves, and the OEMs are notaggressively promoting the available propane models.

To address these market issues, the propane industrywill need to take a larger role in marketing, supportingand, potentially, nancing the propane mower marketif the propane sales growth potential available in thismarket is to be achieved.

Irrigation Pumps: Irrigation pumps provide a high-volume, high-load factor market for propane. Whilethe number of propane pumps in use declinedbetween 2000 and 2010, this trend appears to bereversing. The new propane engines becomingavailable in this market are substantially cleaner andmore efcient than the previous generation of irrigationengines. The major irrigation markets in the Midwesthave access to relatively low cost propane, providingthe potential for signicant cost advantages relative todiesel fuel and gasoline. Environmental advantagesof the new generation of propane engines shouldalso stimulate growth in markets in California and thewestern states.

Generators: The next generation of propane generatorshas the potential to turn backup, portable, and remotepower generation into a major source of propanesales. Kohler, Generac, and other manufacturers arebringing a variety of propane fueled generators into the



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to higher prices and improvements in building andequipment efciency.

Electric heat pump technology is becoming moreefcient and economical and is likely to continue toerode propane heating market share in many regions.

Propane prices have increased substantially relative toelectricity in most regions, and this price disparity is

projected to continue. Since 2000, the propane industry has lost more than350,000 manufactured home customers due to theoverall collapse of the manufactured home marketand to electricity inroads into new units. This trend isexpected to continue.

Growth in natural gas supply is leading to lowernatural gas prices and expansions in natural gasdistribution systems that lead to conversions ofexisting propane customers to natural gas.

Given the expected improvements in electric heatingtechnology, and the expected promotion of electricityas a green energy source by the electric powerindustry, maintaining existing propane customers islikely to become even more difcult. Preserving thecurrent customer base will require an aggressive andcoordinated effort by the propane industry. The majorpropane applications in these sectors have signicantnon-cost advantages over competing fuels and

Maintaining current markets.

Understanding and taking advantage of regionalmarket segmentation.

Capitalizing on the changing relationship betweenpropane and gasoline/distillate prices.

Participating in the national energy and environmentalpolicy and regulatory process.

4.1

Maintaining Current Markets The biggest challenge facing the propane industry overthe next 10 years may be maintaining current marketshare in the residential and commercial sectors. Thesetwo sectors currently account for more than 75 percentof total consumer propane sales. These sectors offera variety of growth opportunities, both in increasingmarket share for existing applications, includingconversion of heating oil applications to propane, andin commercialization of new technologies such asresidential tankless water heaters, portable and backupgenerators, and commercial propane-red heat pumpsand CHP units. However, the threats to these marketsremain formidable:

Propane use per customer has fallen substantiallyand is expected to continue declining in response

4 Key Propane IndustryChallenges and Opportunities

Achieving future sustained growth of propane sales will depend on the industrys success inresponding to the leading market challenges and opportunities likely to be faced in the nextfew years. Key propane industry challenges and opportunities include:



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Even within specic geographic regions, there can bewidely varying differences in weather patterns, customerlifestyles, electricity prices, and competition from othertechnologies and fuels. While many of the regionaldifferences are concentrated in the residential andcommercial sectors, differences in state regulations andelectricity prices also affect propane in other demandsectors. Hence, propane industry marketing strategiesthat can be tailored to specic regional conditions andrequirements will be more successful than a one-size-ts-all national approach.

In the residential sector, regions with signicantpropane market share, and signicant residentialnew construction, are likely to provide the majority ofnew opportunities for propane. The map in Figure Rillustrates where these areas are located. While there isgood market opportunity for propane in many counties

around the country, the majority of high growth marketswhere propane is likely to capture a signicant shareof the new construction and renovation markets arelocated in the Northeast, Upper Midwest, and RockyMountain regions.

technologies - advantages like warmer heat and theconvenience of gas that add value for customers. Thepropane industry will need to emphasize this valueproposition to capture high-opportunity markets andoffset inevitable losses in markets that are driven entirelyby cost rather than value.

4.2

Understanding and Taking Advantage ofRegional Market SegmentationMarket threats and opportunities facing the propaneindustry differ by region and location. The map inFigure Q below shows the wide distribution of propaneresidential heating customers. With the exception ofthe West Coast and the South, where electricity holdsmost of the market, and New England where fuel oilhas the highest share of the residential heating market,propane has more than 10 percent of the residentialspace heating market in most counties. However, thedistribution varies widely depending on climate, energyprices, and availability of natural gas.

Fig.

Q Propane Space Heating Market Share in 2011

0% - 4%

4% - 9%

9% - 15%

15% - 25%

Over 25%



25/28

4.3

Maximizing the Opportunities Created

By Changes in Relationship betweenPropane and Gasoline/Distillate PricesWhen multiple forms of energy are available for thesame function, price becomes a prime consideration inusers energy choices. Given projected long term shiftsin world energy markets, propane prices are expectedto become more competitive relative to diesel and fueloil prices over time. This change is expected to createunique opportunities in the residential and commercialheating markets in the Northeast and Midwest, as wellas in the full range of diesel engine markets.

However, it is not clear that potential customers willrecognize propanes operating cost advantage in heatingand engine fuel applications. Encouraging currentoil heating customers to invest in new, more efcientpropane furnaces will require the propane industry tomake a compelling case for long term consumer benets.Communicating the benets of propane is vital, butinducing customers to switch fuels may also require

facilitating equipment conversions with up-front nancing,as well as other steps to simplify the process. Likewise,in the internal combustion engine market, consumers maynot be familiar with the new, more efcient generation ofpropane engines in non-road applications, and may havehad only limited exposure to on-road propane vehicles.

A major consumer education campaign can help tosignicantly increase consumer awareness and eventualsales of propane-powered vehicles.

Another challenge in the competition of propane withother engine fuels is that the number of propaneapplications for on- and off-road vehicles is currentlylimited. The cost of developing and introducing new

propane vehicles is very high and PERC-fundedapplications that have been under development forseveral years are only now starting to reach the market.

The necessary capital for new vehicle development isunlikely to come from the motor vehicle industry untilmanufacturers believe the market will support a highvolume of new vehicle sales. Consequently, this marketmay require signicant long term nancial support by thepropane industry before it can become self-sustaining.

Fig.

R Counties with More Than 10% Residential Propane + Heating Oil Market Share and Above Average New Housing Construction Activity

0.38%0.49%

0.50%0.74%

0.75% and above

Non-reporting countyMajor PropaneGrowth Opportunities



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to play a signicant role in either promoting or inhibitinguse of propane in a variety of markets. If the benets ofpropane are recognized and considered during energyand environmental policy discussions, propane is likelyto benet from the resulting policies and initiatives.But if these benets are not effectively communicatedand recognized, propane is likely to be regulated thesame as gasoline and distillate fuel oil, which couldconsiderably limit potential propane market growth.

As a result, the propane industry - through theappropriate national and state trade associationsand companies - needs to be actively involved in thefederal and state energy and environmental policyand regulatory process. The industrys companiesand appropriate trade associations must engagepolicymakers in regulatory discussions of specicpriority market development targets, such as alternative

transportation fuels and distributed generation, toensure that propane is adequately considered when newenergy policies are drafted. This makes it essential forthe propane industry to understand the relevant issuesand policy options, know the critical stakeholders andtheir positions, and be seen as an important stakeholderand resource by the organizations and agencies draftingnew policies and regulations.

4.4

Leveraging the Environmental andEnergy Security Benets of PropanePropane is a cleaner-burning, lower-carbon fossil fuelthan other petroleum-based products such as distillatefuel oil, kerosene, and gasoline. Propane is also adomestically produced fuel and the use of propanehelps improve U.S. energy security. In contrast tonatural gas, where the principal component is methane -a greenhouse gas itself - propane has a near-zero directglobal warming potential, making it a preferred fuel overnatural gas in some applications.

PERC and its partners are developing technologies andproducts that build on propanes emissions and supplybenets in applications such as distributed generation,agriculture, and transportation. However, these benets

and applications are not widely recognized by decision-makers in the current national energy and environmentalpolicy debate. Federal and state energy andenvironmental policy decisions, along with the resultingtax policies and regulations on energy use, are going



27/28

Final ThoughtsNorth American energy markets in general, and propanemarkets in particular, are in the midst of a period ofprofound change. Existing propane markets face

growing competition from electricity and natural gas, andexisting demand is falling due to improvements in energyefciency and in response to increases in propane prices.However, the propane industry also has an unprecedentedopportunity to grow demand in a broad range of enginefuel markets as well as in markets where propanecompetes with fuel oil.

The rapid growth in domestic propane production isexpected to support future domestic propane prices ata level below international propane prices. While ICFanticipates a modest rebound in the Mt. Belvieu to crude

oil price relationship relative to year end 2012 propaneprices, we anticipate the ceiling on domestic propaneprices will be set at the world price of propane minustransportation costs to international markets, rather thanthe world price of propane plus transportation coststhat set the oor on domestic propane prices during theperiods when the U.S. was a major propane importer.

As a result, propane prices are expected to remain verycompetitive relative to diesel and gasoline. This, in turn,should make propane a much more attractive alternativeto conventional transportation fuels. The fuels clean-burning and 100% domestic production prole should

provide further impetus to its expanding role in Americasfuel mix.

In addition, the increase in domestic propane productionfrom natural gas liquids provides the propane industrywith the opportunity to brand itself as a clean, domestic,and secure energy source.

Taking advantage of the market opportunities andminimizing the impact of the market threats willrequire concerted action by the industry as a whole,including investments in new technologies and newbusiness models.

Propane Education &Research Council1140 Connecticut Avenue, NW

Suite 1075Telephone: (202) 452-8975Fax: (202) 452-9054

www.propanecouncil.orgwww.usepropane.comwww.buildwithpropane.comwww.propanesafety.com

DISCLAIMER

This report was prepared by ICF International(ICF) for the Propane Education & Research

Council (PERC). The report presents theviews of ICF. The report includes forward-looking statements and projections. ICFhas made every reasonable effort to ensurethat the information and assumptions onwhich these statements and projections arebased are current, reasonable, and complete.However, a variety of factors could causeactual market results to differ materially fromthe projections, anticipated results, or otherexpectations expressed in this document.


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Propane Education & Research Council1140 Connecticut Avenue, NW Suite 1075

Telephone: (202) 452-8975Fax: (202) 452-9054

www.propanecouncil.orgwww.usepropane.comwww.buildwithpropane.comwww.propanesafety.com

Documents

2013 Propane Market Outlook 1